Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Privatisation, ideology, practicality and politics: National Congress of the Australian Society of Corporate Treasurers, Adelaide, Thursday, 28 November 1996: address

EMBARGOED UNTIL DELIVERY 1.15 PM AUSTRALIAN CENTRAL TIME

EOE

It is a pleasure to be with you here today in Adelaide for this important Congress of the Australian Society of Corporate Treasurers.

I was interested to read - in some of the material the Congress organisers sent through to my office - that a simple definition of treasury management is, I'll quote it back to you, "the effective and efficient management of all financial risk".

To a large extent, that is also the role of the Minister for Finance. Review of risk - from the perspective of the Federal Government - means minimising the exposure of the taxpayers of Australia to risk.

The decisions made by governments to start new spending programmes carry the inherent risk of obligating this - and future - generations of taxpayers to pay for them.

It is also contingent on government to constantly review existing programmes and to re-allocate scarce resources to where they are needed most.

Part of that process is to make decisions about the role of government, about what its underpinning responsibilities are, and to examine if the private sector should take over functions which it does better than the public sector.

That was at the core of the decision of the Government, announced this week, to get out of the business of attempting to run railways - the sale of Australian National and the Federal Government stake in National Rail Corporation.

AN stood to lose - for the taxpayers of Australia - $250 million in 1995-96, continuing a history of losses, but there are private operators eager to prove they can return a profit on the rail operations.

The Labor Party Transport spokesman, Lindsay Tanner, has already committed his party to opposing the privatisation proposal in the Senate, describing the decision as, I quote, "a Thatcherite assault on rail workers".

That statement took a lot of bare-faced gall, coming from a spokesman for the Labor Party, which in thirteen years of Government saw the loss of seven thousand jobs in the railways, with another one thousand to go under the AN business plan endorsed by Kim Beazley and Laurie Brereton when they were the responsible Ministers.

Of course, it's ironic to hear the ALP attack the Government for seeking to privatise some assets - not the least reason being that since taking office, I have overseen the sale of the remainder of the Commonwealth Bank and I have settled the issue of loyalty shares resulting from the sale of Qantas. Both were once listed by the Labor Party as "never to be sold" icons. Both were put on the market by the Labor Party.

It's the same Labor Party now alleging this Government is a supporter of privatisation for purely ideological reasons, driven obsessively to sell for the sake of selling.

We do start from the self-evident truth that the provision of goods and services on a commercial basis is something that Government's do not do well. But this is practicality, not ideology.

On the other hand, the Labor Party stand on privatisation reads like a plot from "Jekyll and Hyde go to Canberra"!

Although legislation was passed recently with ALP support to allow the sale of Commonwealth Funds Management (CFM), a funds manager which invests superannuation funds from public sector employees, it was not before some revealing angst displayed by Mark Latham, the Labor "Assistant Shadow Treasurer".

The reason for the angst is the attempt to reconcile support for the sale of CFM (AND Qantas AND The Commonwealth Bank), with opposition to the part-sale of Telstra. Attempting to paper over the gaping chasms in logic, Mr Latham outlined what he says are "six key tests" on privatisation applied by the ALP.

These six so-called 'tests' are a long way from the views once expressed - and one assumes still adhered to - by Party leader Kim Beazley, who as my predecessor as Minister for Finance, talked up the benefits of privatisation in a speech to the National Press Club in 1994. This is what he said:

"Potentially better services and lower prices for consumers, stronger enterprises and greater competition for our economy, and in the broader sense, making government funds available for new policy".

That was Kim Beazley then. And he was right. Now in Opposition, he's keeping a low profile on the issue. His lieutenants are doing all the talking but not making a lot of sense.

Their first so-called test is to ask whether the market - for the product or output of the Government business - is competitive. And the ALP concludes that because Telstra dominates the existing market for telecommunications, it should not be part-privatised.

But the real test of 'competition' is not market share, but the vigour with which customers are pursued.

The question which should be asked is what effect public ownership will have on future competitiveness in the market. The practical, non-ideological answer here is that with private capital involvement, the enterprise will participate and respond to the challenges of competition far better than with the dead hand of Government ownership. Any tendency to exploitation of residual market power by a former Government-owned monopoly can - and will - be curbed by regulation.

The second question Labor asks: can private capital play the role held by public capital? It says the answer is no, but the real answer clearly is "yes".

The scoping study undertaken by the Government in relation to Telstra indicates that there is adequate private capital ready and willing to replace the one third of public capital now funding Telstra's equity base, despite the expected policy settings and the two thirds residual government ownership.

We expect similar commercial interest in AN and NR.

It may be that the Labor Party believes public capital plays a role other than funding the equity base of a company like Telstra, such as the funding of Community Service Obligations - which are actually met out of income, not capital - or funding "industry development" or "extension of universal service". Even if that argument were correct (and it is not), it would only require the Government to retain enough capital to meet those needs - not all the capital of the company.

Part of the rationale for withdrawing public capital from Government Business Enterprises (GBEs) is that some of the capital can be re-deployed to areas where private capital does not play the desired public policy role - in this case investment in the environment and repayment of Government debt.

A better question is "is this the optimal use of scarce public capital?"

If private capital is ready to replace public capital and accepts the public policy overlay that will still apply - by transparent regulation - to the enterprise, it is difficult to argue the case for the application of public capital to the enterprise, when debt retirement and environmental investment (to name some of the priorities) are demanding alternatives.

Another question should be asked (but is ignored by the Labor Party), "is the risk profile associated with the public investment still appropriate, both in absolute terms and compared with the expected return?"

Increased enterprise risk quickly follows from increasing competition, diversification and accelerating technological change. Increasing the risk borne by taxpayers, when private capital will accept that risk and improve its returns, is not practical and should not have a place in the ideology of any political party.

Labor says that - in the case of Telstra - taxpayers aren't contributing to the capitalisation, and it returns a large surplus which is returned to the public in the form of cross-subsidies. That is Labor's third so-called privatisation test.

Raising the issue of cross subsidies is a red herring. As Senator Alston's draft legislation reaffirms, cross subsidies will remain an industry-wide licence condition and depend on regulation, not ownership. Their existence is a bona fide cost of operation - much as hotels have to observe licensing laws and restaurants observe health regulation in the public interest in order to stay in business - and without recourse to public ownership.

The former Government's rate of return ambitions for Telstra, and its dividend polices, did not appear to have been moderated by cross-subsidy considerations. Nor should they. Nor would the ambitions of private capital. Competitors face - and accept - the same obligations on the same terms.

The fourth Labor privatisation question relates to the implications for the ownership of the technology involved. To quote:

"The Labor Party believes, passionately, that the infrastructure for the so-called information superhighway should remain in public hands. That is one of the core responsibilities of the public sector in the modern time".

My answer here is that the public sector is risk-averse in its decisions and is traditionally an inefficient investor in emerging markets. Its record of attempts to "pick winners" and exclude contesting alternative technologies is a recipe for the Australian information "superhighway" to lag the leading edge by a wide margin. Less a superhighway, and more a telephony byway.

If we aspire to be at the leading edge of technology, we need to encourage private investment to take risks, back judgement, and earn risk-related returns overall. Without this environment we will be no better than average or mediocre, and that is not good enough.

There is another anomaly. It was the former Government which amended the telecommunications regulatory regime to encourage (or at least facilitate) the roll out of a competing private sector broadband cable to duplicate the public sector, common carrier infrastructure then proposed by Telstra. While this Government does not shrink from such competition, that action was hardly in line with a "passion" for keeping "the information superhighway infrastructure in public hands". Is this, perhaps, a recently acquired passion?

Labor's fifth privatisation test is about what it calls "universal spin-offs" for the rest of the community.

In the case of Telstra, there are undoubted "spin-off" benefits. But the continuation of the services it provides for telecommunications and telephony - including its appropriate upgrading as necessary - is not a function of ownership. They can and do rely only on regulation. Optus and Vodafone willingly pay their share of the costs despite their private ownership.

This 'test' fails to recognise the advances in regulatory practice that the previous government actually introduced while in office. It is not axiomatic that the meeting of Community Service Obligations starts and ends with the retention of an enterprise in government ownership.

Labor's sixth privatisation test relates to what it calls "substantial externalities", the purchasing power - in the case of Telstra - to support the growth and development of telecommunications in Australia.

It is true that Telstra does provide the base work load for a significant industry sector. It is also true that as the telecommunications service industry has become more competitive and commercial since the late 1980s, so too has competition increased in the industries supplying it. And those industries have prospered as a result.

But private equity will produce at least the same - if not more - pressure on competitive equipment supply, thus keeping the competitive pressure on Australian suppliers.

Unlike New Zealand, where the scale was too small to sustain much of a competitive upstream telecommunications industry, Australia is well placed to exploit the competitiveness of its telecommunications and electronic equipment design and manufacturing industries and their export potential - provided that domestic pressures ensure that they remain competitive.

The rapid pace of technological change and the close relationship between equipment capability and customer service performance, means that an intensely commercial Telstra will be vitally interested in ensuring a close relationship with its equipment suppliers.

It will not be in its interest to be a minor customer in the order book of a remote manufacturer. We are well placed to build a self-sustaining, competitive, industry cluster - provided the impetus is driven commercially.

Labor's six questions it now intends to ask in relation to privatisations are, when you examine them closely, nothing but a shallow attempt to throw a thread-bare veneer of ideology over base politics - opposition to the part-privatisation of Telstra simply for the sake of opposition.

'The Economist' magazine, writing recently about the merger between British Telecom and the American telecom giant MCI, compares what is happening in the telecommunications industry now with the recent history of mergers in the airline industry.

The article makes a valid point that is well worth repeating. In the airline industry, innovations such as wide-bodied aircraft helped to cut costs: and the price for tickets followed.

In telecommunications, the impact of innovation has been far more dramatic, but the cost of delivering an ordinary phone call is now about one thousand times less than it was in the late 1950s. Prices charged by phone companies have fallen much more slowly - the result of monopoly control of markets.

Thanks to technological changes, even in markets with a single local telephone company, customers already have the option of several alternatives such as mobile, cable and internet services. 'The Economist' makes the point that as with air travel, falling prices will stimulate demand - but will also dent profits of the big phone companies. This is especially true of those that lack the private sector freedom to shed overhead costs as prices fall, and to move into new markets and the like.

There is no doubt that Telstra faces the same sort of future and it may be that - under a scenario of total public ownership - Telstra would not be able to rely entirely on its current level of profitability to fund future expansion.

The truth finally dawned on the Labor Party that the taxpayers could not afford an ideological commitment to the public ownership of an international airline, when the question was put to it starkly: choose between jumbo jets or hospital beds.

But at least back then - in the early '80s, the blinkered view of the Labor Party could be excused by its 'public ownership is good' platform - however muddle-headed it may have been.

The Labor Cabinet moved well ahead of the rest of the party on changing that policy, either because of a genuine belief that the entities they sold would be better off as a result - the position Kim Beazley appeared to once support - or for more base reasons: they wanted the money. That was what won the left wing over.

Attempting now to hide behind this veneer of ideology - the six questions on privatisation - deserves to be treated with contempt.

Their true motive is the same as the blocking of Budget savings measures in the Senate: they are spoilers. They want to run interference on the mandate of the Government: to be destructive, not constructive. They are not builders, unless it's the empires of their union mates.

The Role of Government and Business

The question about what is the legitimate role of Government is asked not only here in Australia. The problem is similar in every modern economy: an aging population demanding more services and with fewer and fewer taxpayers from whom revenue can be raised.

The National Commission of Audit, released in June, examined whether Governments should be both an umpire and a player in the field of business activity.

Is it legitimate for government to operate both as an umpire, setting the rules of the game - and as a player? It is the resolute view of this Government that it should get out of the way of business as much as is possible.

It is legitimate for government to establish desired outcomes, but those outcomes will be delivered better - and cheaper - if subjected to open competition.

The bottom line in the consideration of the privatisation of government owned assets is service delivery - how will "desired outcomes" be best delivered to those who rely on those outcomes.

It has been argued by some that Government businesses which turn a profit should not be sold. The converse does not apply - that only unprofitable businesses will be sold. The same considerations apply in both instances and that is: what is the legitimate role of Government, what is the best use of scarce public capital, what is the desired outcome and what is the best way for delivering that outcome?

The Federal Airports Corporation, to raise a timely example, announced a boost in profits this week - earnings before abnormals climbing 25 per cent to $161 million, underpinned by Sydney Airport profitability.

Adelaide Airport - the sale of which has been deferred subject to the conduct of a feasibility study of combining the domestic and international terminals - boosted its profit before interest costs by 38 per cent.

But the profitability - or lack of it - is not the overriding concern on the privatisation question. Because public capital has been applied to a particular enterprise for a period of time - and even if it has turned a profit - is not a reason for never again questioning the legitimacy of continued application of that capital.

When the Government began investing in the infrastructure of airports, it was because private capital was scarce. It was the same reason why the Government bought all the shares of Qantas at the end of World War Two: because there was a scarcity of capital for investment in the private sector. The public sector filled the void.

The circle has turned. Governments have greater social equity demands on their resources and there is private capital available to fill the breech as Governments withdraw from running businesses to get on with the job of the provision of core services.

This is not 'code' for saying government does not have a role in the provision of important infrastructure: but the role should be in setting the terms, conditions and regulations, and not necessarily in the provision of the service itself.

That is not an ideological consideration: it is entirely a question of practicality.