
Issue No 67		18 August 2000

LaborNET	Ask Neale	Tool of the Week

Interview

Slyly Selling the Silver

In their recently published book Privatisation, Sell-off? or Sell out? (ABC Books), Bob and Betty Walker took a long hard look at the major government asset sales of the last decade. Here they tell Workers Online what they've learnt.

What have been the fundamental problems with privatisations in Australia?

Firstly, the lack of transparency. The process should involve steps whereby a government assesses the value of an asset in public hands, versus the benefits of selling that asset. What we have seen in the past is that Governments come into office and they are approached by various interested parties. These are mainly the people who are likely to benefit in terms of the sale process, like merchant banks. They target certain assets which should be sold. The government then makes a decision on which assets they would like to sell. They announce them in the budget papers for instance, or in some media release and then they bring these people in - the outside advisers to give them advice on how to go about selling. There is no process whereby they actually assess the value of that asset in government hands.

Secondly, on the few occasions where there has been disclosure of the calculations used to assess retention, the methods used have been very flawed. Some academics describe them as virtual fraud. They have involved extreme assumptions about the cost of capital and the use of quite inappropriate calculation procedures.

Thirdly, we haven't seen governments broadly articulating what they would like to switch the investment into, after privatisation. They have just pulled the money out, and claimed they are going to reduce debt, or something spurious like that.

Who have been the winners and who have been the losers from privatisation?

The winners have been mainly the people who have been able to afford to buy the shares. They have been the companies who have been involved in the process of privatisation - the merchant banks; the accountants, the lawyers, the advisers to government. It certainly has not been the community.

The losers have been the general community. We did an analysis of seven of the major floats - or privatisations - and we found that they were sold for something like $42 billion and by December of '99 when we stopped writing the book they were worth more than double that. In effect we saw a transfer of wealth from the public to the private sector of $48 billion, just for those seven surveyed privatisations.

In what other ways has the community lost out?

The workforce has lost out. In the Commonwealth there has been a loss of around a third of the workforce since the Coalition came into office.

And the other thing of course is the impact on service provision. We heard a lot of complaints from the bush for instance, following the half privatisation of Telstra.

Then we have the potential loss of services in States like Victoria, where most of the power industry has gone into overseas hands. The new owners are interested in the bottom line, and there is going to be very little interest in improving services there. If anything, we haven't seen the worst of that situation yet.

We are beginning to see the substitution of State owned, regional monopolies with international cartels which are operating across State boundaries. The ideals of national competition policy and competitiveness are likely to be eroded by the existence of cartels which are seek initially to drive out competition, and which soon be able to turn a big profit.

So one of your major criticisms is how governments actually value assets or efficiency in operations?

Yes. That is one thing. Consultants have been promoting the sale of government businesses rather than systematically appraising the value of those assets. Valuation procedures have been biased towards encouraging asset sales.

For example the State Bank of NSW was sold for about a seventeenth of its value. The net proceeds were just over $160 million. A few years later it is making that per annum. It was recently valued at between $2.6 and $2.9 billion by Arthur Andersen. The Fahey Government sold it too cheaply.

The main problem has been that the analysis has not been done properly; and governments have focussed solely on financial factors and not looked at the impact of asset sales on services to the community. And they haven't talked about alternative avenues for investment which might provide better outcomes for the community.

Sometimes politicians do say "we are going to sell in order to invest in other infrastructure." But they never seem to specify what that new infrastructure will be. That is one of our problems with the sale of Telstra. We are told that they are going to sell in order to reinvest the money in other infrastructure. Now, what more crucial industry is there in a large country like Australia, than communications infrastructure? We have a problem with that.

Much of political rhetoric around privatisation centres on the maxim that "all debt is dangerous". Is this true? Does the private sector operate in this way, and are our debt levels high by international standards to justify this?

That was one of the reasons we wrote this book - that kind of sloganeering, that debt is bad and we must reduce it. The fact is that when we look at Australia in terms of the world situation, we are one of the lowest indebted countries in the world when you look at it as a percentage of our GDP. If you look at a country like the US, which is regarded as the most successful economy in the world its ratio of debt to gross domestic product is around 41%. Japan is 46%. The average for the whole of the OECD is 45%, and even higher for the European community. The Australian total is something like 7%.

You say that our Government Trading Enterprises have been undervalued and the analysis of their profitability or efficiency is either false or questionable?

Their reported profits have been calculated on a different basis to the private sector and people have made invalid comparisons between their profitability and the profitability of private sector firms. The accounting methods are so different it is just not valid to compare the reported figures.

Consequently governments may have undervalued assets in their own mind, believing the reported figures and thinking that government owned water and electricity businesses were not very profitable. If the figures are reworked using private sector accounting methods, a different picture emerges.

Some of the overseas bidders, particularly for electricity assets, paid prices which were surprisingly high, even allowing for past understatement of GTE's profits. But others see that as an effort by foreign companies to get a foothold in a market which has got a stable political environment, and where the new owners could expand their operations through the gift provided by national competition policy. It's been easier for new owners of electricity businesses which have long term contracts to deliver energy.

At the heart of your critique is the claim that there is a lack of a vision of what government should do?

Absolutely. To our knowledge, there has been very little talk by politicians or others about what government should be doing, as opposed to what they shouldn't be doing. There is always the talk about government should be made smaller, without any rationale as to why that should be the case. And smaller to do what? We are never told any of that. And there has been no real debate or the debate has been at the margin. Every time a government's identified a particular business to sell off, they say, well governments shouldn't be in this industry or that industry. And it is always a debate at the margin about shedding something, without really articulating the vision of what are the new things governments should be doing.

Henry Mintzberger, a Canadian management writer, argues that in a democracy we can't afford not to have wide-ranging communication and political debate, so maybe the government should own some newspapers, rather than have the media concentrated in private hands. Now, he's a fairly right wing management writer. Maybe the current, local equivalent to that idea is to ensure that there is widespread access to the internet and other modes of communication - and that we retain certain types of electronic media in public hands. Yet the way things are going in Australia we should fear for the future of the ABC, unless there is some greater challenge to the orthodox thinking about privatisation.

What effects has privatisation had on processes of accountability and transparency in government?

Well, they have been largely eroded. The fact is that any Stock Exchange listed company is required by Stock Exchange listing rules to provide more information to shareholders about the proposed sale of major business undertaking than we have seen governments provide parliaments about the proposed sale of government assets.

Some years ago when Bruce Baird was the Minister for Transport he refused to give the NSW Parliament any documentation about the contracts for the M2 motorway.

Proposals for major infrastructure projects are not being put on the table. The rationale for outsourcing is confined to analysis within government agencies, often without public scrutiny.

We have had the spectacle of the Victorian government under Kennett amending the FOI Act to make sure that major contracts involving billions of dollars cannot be examined by the community. Certainly the story has been one of increasing government secrecy about major deals.

And when you have obtained the information on those deals you can see why the government has been so secretive - because of the great benefits to the private sector in those ventures.

These things have occasionally been debated. Public Accounts Committees in NSW and Victoria, for example, have agreed that summaries of contracts for major infrastructure financing deals should be made public and published.

In fact, contract summaries are being prepared in NSW, but they are not even available in the parliamentary library. They have been prepared by individual agencies, and kept there.

You seem to give the impression that governments are also out of their depth in being able to make these decisions?

To a large extent. When the former Auditor General, Tony Harris, retired, we went to his farewell lunch and he was saying that when he started as Auditor General he found that there weren't staff capable of doing the present value calculations needed to analyse infrastructure financing deals. And it is even worse in the rest of the public sector.

Nick Greiner, when he published the first guidelines on private sector involvement in infrastructure financing, said it would be appropriate for the government to outsource the analysis of these because he didn't think that the public sector had the capacity to do it.

And that hasn't changed to any great extent. The skills of the public sector are still at the same level, or similar levels. Politicians basically are relying on outside advisers to tell them what the situation is in regard to decisions they want to make.

Another problem is that the bureaucracy tends to be reluctant to appoint people who have got more talents than themselves. And the fact is, the chief financial officers of some of largest government departments in NSW are unqualified - they lack tertiary qualifications in accounting, and are not members of the two major recognised professional bodies. Yet these agencies are dealing with billions of dollars per annum.

What sort of effect will the loss of revenue have on finances of Australian governments in the future?

It will take a decade or more to see the full effect, because we are still seeing government finances being propped up by asset sales, though we are now scraping the bottom of the barrel to some extent. The fact is that electricity and water have both been very good earners for governments. Their profitability has been distorted by the use of unusual accounting techniques. Certainly accounting techniques which are not used in the private sector. They have been far more profitable when they have been reported on a private sector accounting basis. They have strong cash flows. They are providing services for which demand is largely inelastic - people still need to use water and electricity regardless of their income. The history of price regulation of basic utilities in Australia and the United States demonstrates how over time regulated industries find ways to earn high returns, notwithstanding the best efforts of the regulators.

So governments that sell off good businesses are going to lose those cash flows in future and over time this is going to have an increasingly hard effect on their own budgets. Victoria in particular has sold off virtually everything.

The Commonwealth too in selling off shares in say, Telstra, is losing the revenue stream that came from Telstra's dividends. And it is a significant income stream for the federal government. Billions of dollars a year.

Meantime the proceeds of sale are going into recurrent spending on things which aren't going to generate revenue in the future. Much of that spending is on election pork barrelling.

What would savvy business leaders think about this?

I have sat at lunch with some businessmen and they say "it's just bloody ridiculous. Howard is selling off Telstra and pissing the money up against the wall." And they say even if you put the money into hospitals and schools, they don't really produce revenues, so you are going to have some cash flow problems down the line.

And there are people who are gaining from privatisations. They are in that small group who are actually gaining from this process.

What can we do now that the horse has bolted?

We don't think it has. We think that we have still got lessons to learn from the last decade, because that is all it has been in Australia. Very few sales happened before 1990.

But it seems to us that there are still some crucial assets left in most States except Victoria and South Australia, which have sold their power industry. We feel that there is time to learn those lessons before any state government considers the sale of further essential services. And also in the federal sphere we feel that the government should pull back from selling Telstra, because in our view, heading into the 21st Century, it is crucial that governments maintain an operating interest in telecommunications.

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Issue 67 contents

Interview: Slyly Selling the Silver
In their recently published book Privatisation, Sell-off? or Sell out? (ABC Books), Bob and Betty Walker took a long hard look at the major government asset sales of the last decade. Here they tell Workers Online what they've learnt.

Politics: Dysfunctional Society
Noel Pearson looks at the plight of Aboriginal people through a prism of class and comes up with a challenging perspective on Aboriginal welfare, law and order and the state of our society.

History: Money Power
Should the People or the Banks Rule? Reserve Bank Governor McFarlane thinks he knows the answer. Eddie Ward was pretty strongly of the opposite view when the ALP introduced the Commonwealth Banking Legislation in 1945.

International: Soccer Pro Tackles Nike
Olympic sponsor Nike is under pressure over its human rights record in the run up to the Sydney Games.

Economics: Globalony
Frank Stillwell looks at the contradictory nature of the globalising economy and fears it is turning into a race to the bottom.

Satire: IVF Debate: Federal Government Tells Lesbians: "Get Fucked"
MELBOURNE, Monday: The Federal Court decision to allow single women and lesbians to use infertility treatment in Victoria has been attacked by the Federal Government, the Catholic Church and by pro-family community groups.

Review: Confessions Of A Union Buster
It's not a new tome but the threat for Australian Unions remains the same if not greater as when this book appeared five years ago.

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