Tuesday, September 02, 2008

Liberals need to seize the nettle on power issue

The Age

On the same day that NSW Opposition Leader Barry O'Farrell torpedoed the NSW Government's plans to privatise the state's electricity generators, Tony Abbott wrote how in 1995 the Liberal Opposition in Canberra addressed a similar matter.  Abbott relates how he advised John Howard to block the Keating government's proposed partial privatisation of the Commonwealth Bank by forging an unholy alliance with Green and Democrat irrationalists who were opposed to private enterprise full stop.  In Abbott's view, blocking privatisation was justified because the Keating approach did not go far enough.

Howard rejected the Abbott proposal and went for what he thought was the more principled position of supporting the Keating plan because it was a reform, if flawed.  Contrast this approach and the choices behind it with the decision taken by O'Farrell.  The Liberals have a gaggle of members who are LINOs, Liberal-In-Name-Only, and seem to think that it is more efficient for the electricity industry to remain in government ownership.  Others just see a political opportunity to embarrass the Iemma NSW Government by blocking reform.  Some may feel the privatisation should go further than proposed by Iemma.

But the Liberal Opposition in NSW has taken neither the supportive stance that Howard decided upon regarding the Commonwealth Bank nor the option Abbott suggested.  Abbott's suggestion, though conceived in a political alchemy, would have remained principled by putting forward the alternative of a comprehensive privatisation, which once in office the Liberals undertook.  In electricity industry terms, the Abbott proposal would have advocated the industry's full privatisation -- the generators, lines businesses and retail arms.  All O'Farrell has said is he supports privatisation as a concept but now is not the right time.

Government tax and regulatory proposals concerning the Carbon Pollution Reduction Scheme have indeed created uncertainty about the valuation of electricity businesses, especially coal-fired generators.  But does O'Farrell think that is going to go away?

It would have been a legitimate political approach for the Liberals to oppose the privatisation proposals of the Iemma Government unless this included the sale of the poles and wires businesses:  Country Energy, EnergyAustralia, Integral and Transgrid.  Sale of these four NSW distribution and transmission businesses would raise considerable funds.  If Victoria is a guide, the NSW poles and wires businesses would be worth north of $15 billion and perhaps $20 billion.  And these are assets that are less at risk from arbitrary regulatory intervention than the generation businesses.

Raising funds, however, is only one consideration, and possibly not even the most important aspect of privatisation.  All electricity poles and wires businesses are regulated with regard to their capital spending as well as their reliability and charges.  But this is only one ingredient in getting the best outcomes.  Private ownership of businesses imposes efficiency disciplines that are absent in NSW where the distributors and the Transmission business don't have commercial shareholders to satisfy.  As a result, the NSW firms tend to be overstaffed, perhaps by 10 per cent compared to their Victorian counterparts.

The NSW lines businesses also tend to gold-plate capital spending.  Victorian private businesses tend to underspend the capital expenditure allowances the regulator grants them because they find ways of delaying investments, or doing them cheaper than originally intended.  Such efficiencies do not take place in government businesses which take the view that they either spend the allocated capital or lose it.  And, although comparisons are difficult to make, the private network businesses in Victoria and South Australia have shown better improvements in reliability of supply than the government-owned NSW (and Queensland) networks.

Finally, the ownership of electricity networks by government hampers the businesses' abilities to seek synergies and savings by entering new areas of activity or spinning off some existing areas.  Since privatisation, none of the Victorian businesses are recognisable from their previous government identities.  All have joined alliances with other firms delivering similar products, or sold parts that did not fit the most profitable strategic directions.  The flexibility to take such decisions is not there with government-owned firms which, in spite of being corporatised, have a sole shareholder who will look at proposals through the prism of politics.

Having forced the abandonment of plans to embark on electricity privatisation in NSW, O'Farrell now has to show the sort of principle that gave the Liberals such kudos over 13 years of government.  If he allows the LINOs and opportunists to dictate the Opposition's policy, he does not deserve to win office.


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