
Issue No 68		25 August 2000

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Economics

The Final Station

By Christopher Sheil

Corporatisation was first introduced into Australia by the former Greiner Coalition government. What is 'corporatisation' and who should we hold to account under its prescriptions?

Carl Scully has been repeatedly attacked for the serial disasters that have struck the State's railways. But is Scully the right one to blame? Not under the theory of 'corporatisation', according to Christopher Sheil in this excerpt from his new book, Water's Fall: Running the Risks with Economic Rationalism (Pluto Press).

Mrs Thatcher rejected 'corporatisation' for Britain, choosing instead to go directly to privatisation. She dismissed the idea of trying to make a government authority imitate a private firm as 'like trying to make a mule into a zebra by painting stripes on its back.'

As this suggests, and as many other observers have suggested, 'corporatisation' is a 'next best' concept. It is the final public station along the line to privatisation. Conceptually, the perfectly corporatised organisation is one that exhibits every theoretical virtue economic rationalism attributes to private commercial firms, with the exception of the legal fact of it remaining in public ownership.

In the terms of economic rationalism, corporatisation is generally considered to be an advance in its own right, but there can be no doubt that the real strength in its appeal to market liberals stems from its role as a necessary stage in a larger process. If an organisation can be completely restructured along private lines, the final legal fact of ownership can be destroyed when a political opportunity presents itself, or, if necessary, the deed can be done by a future government.

The important thing from the perspective of economic rationalists is to achieve the restructuring, and to then find ways to keep up the public pressure for privatisation. In a worst-case scenario, the privatisation may be achieved in stages.

Where did it come from? Corporatisation was born in New Zealand of Australian and American-or, more precisely, Chicago-parents, and it was returned to Australia via the Greiner government in New South Wales. This is not to suggest that Australia's governments did not seek to minimise waste and improve their effectiveness prior to Greiner's election in 1988.

On the contrary, Australia has a long history of practical and often innovative public service reform-an established 'talent for bureaucracy' which helped to create, amid much else, the nation's distinctive 'wage-earners' welfare state'. What distinguishes corporatisation, and this cannot be stressed too much, is not its commitment to efficiency or effectiveness, but its conceptual link with privatisation.

The corporatisation model was, apparently, built by New Zealand Treasury officials in the early 1980s, when the conservative government led by Robert Muldoon was in power. The officials visited Australia and worked with the Centre for Policy Studies in Melbourne, where they tooled up with the new managerial theories about the firm, property rights and principal-agent relationships.

By the time the New Zealand Labour Party was elected in 1984, the officials-who had metaphorically "locked themselves away in a sort of catacomb somewhere underneath the Treasury"-had their ideas well worked out and they captured the support of the new finance minister, Roger Douglas.

The New Zealand model was studied by the NSW Liberal Party in opposition and introduced after its victory in the March 1988 State election. It subsequently permeated the public service through the special premiers' conferences of 1990-91 and the Industry (now Productivity) Commission, and was entrenched with the adoption of the national competition policy by all of Australia's governments in 1995.

Corporatisation close-up

What is corporatisation? The theory of corporatisation has one objective around which all of its other rationales are clustered or from which its justifications are derived. It aims to increase the commercial value of public assets; that is, corporatisation seeks to increase the rate-of-return on public assets, as measured against, and in competition with, the returns available from other comparable market investment opportunities.

In technical terms, corporatisation aims to increase the 'net present discounted value' of water's future profit stream relative to its 'opportunity cost', which is defined as the value of the risk-weighted interest rate forgone because of the public's 'choice' to invest in water.

In plain words, the idea is to convert water and other public services into valuable corporate commercial activities, which means subordinating public content to commercial imperatives.

Subordination to commercialisation requires two conceptually (if not practically) straightforward things to happen. Firstly, all the objectives of the corporatised body must be unequivocally subordinated to the single, measurable, commercial objective of increasing the rate-of-return.

Secondly, to ensure an accurate measure of performance, direct operational costs or benefits which distort the accuracy of the financial bottom-line and are due specifically to the services being publicly owned must be stripped away to create a so-called 'level playing field' with private firms.

With their organisational purpose so radically simplified, the theory holds that full responsibility for realising it must be delegated entirely to managers within the bureaucracy, who must be made responsible to boards of directors for achieving target rates-of-return.

The boards must comprise experts in business, not representatives of the community, and they must be liable for the performance of the enterprises against commercial criteria. To ensure the theory is put into powerful motion, through the boards, the government (as the owner, or 'principal') must pay the managers (as 'agents') large salary incentives linked to commercial rate-of-return targets, and their security of tenure must be withdrawn.

The boards of directors are to be appointed by the government, but it is otherwise to be virtually excluded from any direct involvement with the corporatised enterprises. This reduced government status is characterised as being akin to that of a 'shareholder' (on behalf of 'taxpayers', or the 'shareholders of NSW Inc', as Greiner expressed it).

Prices are to be set in the marketplace or, in the case of monopolies, by an independent and separately established 'regulator' charged with commercial criteria. Governments cannot, of course, sell or transfer their ownership responsibilities in the same ready way that private shareholders can, and nor can public bodies be permitted to go bankrupt. To atone for this impurity, the theory requires the establishment of commercial performance monitoring regimes in Treasury departments to act as surrogates for the disciplines that debt and equity markets theoretically place on private firms.

The monitoring regimes must be based on corporate and business plans specifying the scope of the enterprise's activities, and its rate-of-return targets, dividends and borrowings, as negotiated between the Treasuries and the corporatised managements.

Corporatisation, in sum, means reducing the purpose of public authorities to earning money and reducing governments to appointing directors, setting financial parameters and targets, monitoring progress and collecting dividends. Any further government involvement is pejoratively held to be 'political interference' (by public choice theory) or 'incentive diluting' (by principal-agent theory).

Instead of being directly responsible for public services in the conventional Westminster way, ministerial authority must be limited to determining policies and administering laws for the economy in general, or, as a second best option, for the industry at large within which the corporatised body operates.

The restraint all of this places on governments is the cornerstone of economic rationalism. 'That we have been able to achieve a reasonably high degree of order in our economic lives despite modern complexities', Friedrich von Hayek wrote in 1976, "is only because our affairs have been guided, not by central direction, but by the operations of the market and competition in securing the mutual adjustment of separate efforts".

"We should adopt self-denying ordinances that limit the objectives we try to pursue through political channels", Milton Friedman wrote in 1990: 'We should not consider each case on its merits, but lay down broad rules limiting what government may do'.

'Corporatisation is important', the Productivity Commission wrote in its 1998 annual report on microeconomic reform, 'because it...ensures that the enterprise operates independently from government'.

Since economic rationalism defines direct government 'interference' as either effectively corrupt or a regrettable diversion from optimising, ministerial interventions must be explicit and documented.

If a government wishes to keep one of its corporatised bodies to a particular standard (for example, an environmental standard), this must also be applied to private firms, or at least to all of the operators in the same industry-and preferably it should be applied by a separate and also independently established regulator.

In the unfortunate event that a government still wishes a corporation to deliver any traditional public services in these rationalised circumstances, such as lower prices to encourage investment or to help their poor citizens, in order to avoid polluting the commercial objectives, these must be separately identified and funded as explicit 'subsidies' from general tax revenue and called 'community service obligations' (or CSOs).

Ideally, CSOs should be awarded through a competitive tendering process wherein the corporatised authority is nothing but one of many commercial bidders.

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Issue 68 contents

Interview: New Unionist
Britain's Trade Union Congress secretary John Monks on life under Blair and why the future of unionism could well rest in Europe.

History: The Victims of Whiggery
George Loveless, the leader of the rural workers who became the Tolpuddle Martyrs, recorded his ideals and experiences in a pamphlet that brings his story to life.

Economics: The Final Station
Corporatisation was first introduced into Australia by the former Greiner Coalition government. What is 'corporatisation' and who should we hold to account under its prescriptions?

International: Massive Union Win in American Telecom
The Communications Workers of America (CWA) announced on Thursday a settlement with Verizon Communications ending a fifteen day strike by 87,000 telephone workers from Maine to Virginia.

Unions: A Vital Community Service
What keeps the engine of the Australian economy running? Manufacturing productivity, the stock market, exports? Try child care.

Satire: Putin copies Clinton: dead seamen stains reputation
MOSCOW, Tuesday: Russian naval authorities today faced staunch criticism, and the anger of a nation gripped by tragedy, as they conceded that all 118 Russian submariners trapped in the nuclear submarine, the Kursk, had died.

Review: Blow Up The Pokies
Whether it arouses public debate about Gambling is best left to the public but Peter Zangarri thinks Tim Freedman is on a winner with the Whitlam's latest CD.

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