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Understanding privatisation

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1985, SYDNEY. (12.15 pm)


Enquiries (062) 726623

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’Privatisation', a word that no one likes but for which no one has yet provided a satisfactory alternative, is on everyone's lips these days. You could say that it has become fashionable. There is always a danger that when

an idea becomes fashionable it will become merely a passing fashion, regardless of its intrinsic merit. .

The Opposition regards privatisation as an important element in our attack on the structural problems of the Australian economy, along with reduction of government expenditure, rationalisation or elimination of government programmes, and deregulation. Privatisation will have

a significant impact on labour market deregulation in particular, and should also be seen as linking in with deregulation in other areas such as transport and communications, where the combined cost reduction effects

could be marked.

My aim today is to indicate the framework within which ' the Opposition is approaching the issue of privatisation.

Let's begin with the basics. One in every four Australian workers is employed by the Government. Of this one quarter of the Australian workforce, State Governments between them take up the largest share, 63X. The Federal Government

employs 29X and Local Government, 8%. As we shall see, privatisation applies to all levels of government, but most of all, at least potentially, to State Government.

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Because I am in federal politics I have analysed the functions of federal government more closely. . There are about half a million federal employees, and under the Hawke Government, the number is rising. Only 30* of these employees are engaged in what I would call traditional public service functions such as:

e Policy advice and implementation

e Tax Collection

e Armed Forces

· Law Enforcement

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B e f o r e t h e b i g I n c r e a s e s i n t h e p u b l i c s e c t o r t h i s c e n t u r y e m p l o y e e s i n t h e s e a r e a s w e r e g i v e n c e r t a i n p r i v i l e g e s I

s u c h a s s e c u r i t y o f t e n u r e i n e m p l o y m e n t a n d p e n s i o n s ·

t o m a k e t h e m l e s s s u s c e p t i b l e t o p o l i t i c a l p r e s s u r e s !

o r b r i b e s . T o d a y h o w e v e r 7 0 % o f f e d e r a l g o v e r n m e n t e m p l o y e e s ' a r e e n g a g e d i n t r a d i n g a c t i v i t i e s , s u c h a s T A A , Q a n t a s o r T e l e c o m , o r i n m a j o r o p e r a t i o n s s u c h a s p a y i n g p e n s i o n s o r h e a l t h r e b a t e s , o r r u n n i n g a i r p o r t s . T h e t r a d i t i o n a l

t e r m s a n d c o n d i t i o n s o f t h e p u b l i c s e r v i c e d o n o t s u i t t h i s t y p e o f a c t i v i t y . W h y ?

B e c a u s e o f t h e u l t i m a t e r e s p o n s i b i l i t y t o t h e t a x p a y e r t h r o u g h P a r l i a m e n t , p u b l i c s e c t o r m a n a g e r s a r e s u b j e c t t o p o l i t i c a l c o n t r o l o v e r a n d t h e r e f o r e i n t e r f e r e n c e i n t h e s e v i t a l m a n a g e m e n t f u n c t i o n s :

e F i n a n c e , s u c h a s t h e a m o u n t o f c a p i t a l

t h e y c a n r a i s e o r w h a t t h e y c a n c h a r g e f o r t h e i r s e r v i c e s . F o r e x a m p l e , B o a r d s s u c h a s Q a n t a s a n d t h e C o m m o n w e a l t h B a n k h a v e b e e n m o s t c r i t i c a l o f t h e i r r e s p e c t i v e

c a p i t a l s t r u c t u r e s , w h i c h a r e d e c i d e d ' b y C a b i n e t .


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Management practices, which are often rigidly controlled according to rules set down by centralised authorities such as the Public Service Board. In my view the A.B.C. in unmanageable under the present rules. Even if it had a perfect board and management it would still be in trouble.

Personnel management, for example, there is no freedom to hire and fire, or to pay by result.

Industrial relations, where the major negotiations are controlled by the Public Service Board, and

Marketing, where public sector bodies are not free to move into new products or markets without government permission.

These controls are appropriate for the traditional public sector functions, but not when you are trying to run a business or carry out large scale operations.

Let's look at this in another way. Both the public and the private sector are subject to the same forces of change in public demand or external pressures. The public sector is much more rigid, much less adaptable

to such c h ange. In the public sector adjustment to change is made administratively, and it might require changes in legislation. Political decisions are involved, and these always cause delay and difficulty. Also, decision making is necessarily centralised, to preserve public

accountability, and of course if things go wrong, there are no clear penalities. Public organisations can't go broke and public servants can't be sacked. Politicians can usually dodge responsibility for any single failure.

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By way of contrast, in the private sector, adjustment to external forces is happening all the time, every day in the marketplace. Decisions can be taken quickly and privately. There are millions of decision makers, all acting independently. Those that meet the demands of customers and successfully respond to change prosper.

Those that fail go broke. There is real incentive to serve the customer. This gives us a good idea as to why we should privatise.

If we move a trading or operating function from the public to private sector, provided there is competition,

· There is a direct incentive to meet

consumer needs. „ ·

· The discipline of the marketplace replaces the political pressures exerted by particular interest groups.

e Capital, talented people and rewards go

to the successful performers,

· The unsuccessful go broke.

· The overload on government is reduced, and in those cases where you sell off government enterprise, *

· the proceeds of the sale can be used to pay off government debt. (They should not be used as an excuse for failing to trim current government expenditure).

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There are of course some negatives you have to watch.

· Private owners will have an incentive

to exploit a monopoly situation. You must guard against that, preferably by ensuring that you don't merely turn a government monopoly into a private monopoly. It is better to break it up

to ensure competition.

e There is also a disincentive to provide

uneconomic services. You have to decide whether, as a matter of policy, you want them to continue, and if so how they will be paid for. Rural postal and telephone services provide an example.

e The terms and conditions of employment

■ of existing employees will not often meet

the needs of the new format. Careful personnel policies will always be needed to safeguard the interests of employees, some of whom might not wish to leave the public sector. Existing suppliers might also be affected. Again, you have to decide what, if anything, to do about


In theory you would want to privatise all but the traditional public service functions. However that is impracticable, so you must have some criteria for picking the most suitable privatisation targets. The way to do this is ±tr measure,

in each case, the net benefits, that Is advantages less disadvantages, for consumers; who are the users or potential users of the service, and the general body of taxpayers.


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Look for where you can achieve

e Lower prices, better quality, wider choice

Improved innovation in goods or services

e More output, or

■ High sale proceeds

Thus the real cr iterion for privatisation is consumer benefit, and the "most important method of achieving better benefi ts is through competition. Competition is the key factor. ■

How, then, do we go about it?

Most public debate has concentrated on privatisation by sale. That is easy to understand. For example you can easily sell off TAA. However there are many ways of privatising, and you must choose the best way for each pa rti cul ar case, e.g.

Fraser Government began to expand the private section of education by providing subsidies for private schools. Parents voted with their feet. Senator Susan Ryan is now stopping this process.

• It can be done gradually by letting the

private sector handle all growth and replacement. This would be a good way to privatise the hospital system, wherever pr ivate capital and skills can do the


■ Privatisation can be consumer led. The

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• You can transfer the assets without a sale. Medibank private could be given to its contributors, forming a genuinely private health insurance co-operative.

• You can contract out. All public hospital cleaning, catering and laundry should be handled this way. You could save $50 million per year in NSW public hospitals by contracting out.

• And then of course you can sell an enterprise to private investors.

Where sale is the preferred method, there are 3 key points to watch.

Competition after privatisation is more important than the sale price. You can always get a high price by conferring monopoly status on the new owners, but that would defeat your purpose, which

is to get the maximum consumer benefit. The sale proceeds are a once only benefit, whereas the lower prices and better qualtiy resulting from competition will go on

for ever.

Careful sale management is essential. You must employ the best merchant bankers and brokers as advisers, and make sure the sale is handled smoothly and effectively. A thousand hostile observers will be waiting

to criticise. You c a n ’t afford a debacle with a float.

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• It is wise to involve employees and small ,

shareholders. 9 6% of British Telecom employees took up shares against the advice of their union, and over 2 million individuals applied for and were allotted shares. Privatisation is a means of widening employee profit sharing, and also of widening private ownership of shares generally. You can enlist an army of effective salesmen for privatisation by involving employees and

the small investor.

To summarise, here is a simple policy guide to apply to privatisation.

Design each scheme to achieve the greatest consumer benefit -

Remember that competition is the best guarantee of consumer benefits

Sale is not the only way of privatising, nor is the sale price the main criterion

You must decide on your policy on providing uneconomic services, and explain it to everyone . . .

You should enlist the staff as your allies. Point out the freedom they will gain in the private sector. Offer them shares on a preferential basis. Also involve small



Ensure that the interests of existing employees are adequately protected in the changeover

Begin where the consumer benefits are greatest.