Reform or sell off government businesses for efficiency and profit

State government businesses worth more than $200bn are ripe for commonsense productivity reform and privatisation.

NSW alone accounts for businesses worth $60bn that could be privatised, and this is echoed in other states and territories where road, power, water and waste businesses could be run more effectively by the private sector — and release funds for core government services such as education, health and community services.

For case studies, we need look no further than the “golden era” of NSW government enterprise reform in the 1990s when an ambi­tious program of micro-economic measures lifted labour productivity and dividend-tax payments threefold.

Most attention on past micro-economic reform has focused on federal government initiatives such as further reducing import tariffs, floating the Australian dollar, exposing local banks to foreign competitors, deregulating the telecommunications industry, adopting enterprise wage bargaining, and privatising AUSSAT (now Optus), Telstra, Qantas, the Commonwealth Bank and CSL.

However, significant reforms of government-owned businesses occurred at a state level, which resulted in a substantial boost to their efficiency that released scarce resources for more pressing needs.

The key entities in this transformation — all of which showed considerable productivity, profit and customer service improvements — included passenger and freight rail, bus and ferry, seaport, water and sewerage, housing, land, lotteries, forest, waste, electricity generation, transmission and distribution businesses.

There were possible reasons for those gains waning in the early 2000s (at which time the NSW government ceased publishing performance reports on the sector). But five important lessons can be drawn from NSW’s effort to rejuvenate its government businesses after 1988.

The first is that government businesses need to operate like private enterprises if they are to generate a commercial rate of return, otherwise their dividend and tax contributions to funding general government services — such as health, education and police — will stagnate or fall, as they did after 1997-98.

The second is that if government businesses are required to provide social benefits (for example, pensioner concessions), they should be compensated from the government’s budget, so that their commercial charter and culture are not compromised.

Governments can perform social and commercial roles, but if it mixes the two it creates conflicting objectives that undermine each sector’s raison d’etre and corrupt its modus operandi.

Third, all government businesses should be genuinely commercialised and corporatised so as to maximise their productive efficiency. That would help to contain their prices and debt while boosting their dividend and tax equivalent payments to their owner, the government — as happened during the reform years of the 90s.

Fourth, it’s difficult to operate commercial businesses in the public sector because it is driven by politics, not markets. In other words, votes count more to politicians than do consumer dollars.

That appears to have happened in the 2000s. This is one reason governments privatise their own businesses — because they find it too hard to run them commercially instead of politically.

Finally, all government business divestments should be subject to Australian Competition & Consumer Commission scrutiny and approval to ensure they don’t result in market distortions that disadvantage consumers — such as the restriction on competition between the trade ports of Newcastle and Sydney-Port Kembla.

These lessons remain relevant today because while there are fewer government trading enterprises than before, politicians are still bent on overturning their commercial imperative. Witness the recent ministerial orders in NSW stopping Essential Energy lifting its productivity by shedding 180 jobs in regional NSW. These cost savings could have boosted dividend payments to the government, which it could then have used to hire more teachers and nurses in rural towns.

These conclusions square with David Osborne and Ted Gaebler’s 1992 public policy text that recommended the public sector should focus on “steering rather than rowing”. In other words, government is best suited to making public policy and regulations, redistributing income and subsidising worthy causes with a view to achieving a safe and fair society; while competing private firms do best at selling goods and services to consumers to ensure economic prosperity. A mixed economy should not mean the government and private sectors replicating each other’s roles but each sector doing what it does best and complementing the other’s strengths.

This reinforces the case for privatising remaining government businesses so they can behave as businesses, not job refuges. Simply corporatising them is not enough.

Percy Allan is the author of the Centre for Independent Studies paper Reform, Retreat and Relinquishment: Lessons from Historic State Ownership of Businesses in NSW. He is a former secretary of the NSW Treasury and chairman of the NSW premier’s council on the cost and quality of government.