‘Prices will go up if SOEs are privatised because they will have to make profits.’ What is wrong with this claim?
First, SOEs are supposed to make normal profits now: to operate as efficiently as successful private businesses. If they don’t meet their cost of capital (achieve normal profits), this is an indication that they are not being managed efficiently or that capital should be reallocated elsewhere in the economy.
Dispensing with the role of profits as a resource allocation mechanism was a socialist illusion that contributed to the collapse of the centrally planned economies.
It follows that there is no reason to expect prices to rise more with privatisation than under public ownership (unless they have previously been suppressed for political reasons under state ownership). To the contrary, other things being equal, prices should fall or rise more slowly with greater private sector efficiency.
Australia is often a useful economic laboratory given the different jurisdictions of its states and territories. A recent study looked into trends in electricity prices in four Australian states and compared the performance of the private and state-owned electricity distributors. The five distributors in Victoria and South Australia are privately owned whereas those in New South Wales and Queensland are owned by the state governments.
The results of the comparisons are striking:
Figure 3 compares the revenue per connection from government owned and privately owned distributors. The government owned distributor curve is the weighted (by connection number) results for the distributors operating in NSW and QLD, while the privately owned is the weighted result for distributors operating in Vic and SA. The figure shows the clear divergence, particularly from 2009 onwards, in revenue per connection for government and privately owned distributors.
The study also employs a more sophisticated analysis to benchmark the efficiency of the distributors. The results of that analysis are that:
… the average performance of the privately owned distributors is at the upper-quartile of all distributors. By comparison, the average government owned distributor is around half as efficient as the average private distributor (i.e. they incur more than twice as much expenditure to deliver the same level of output as the average privately owned distributors).
The consequence is that:
- Government owned distributors currently charge almost twice as much as privately owned distributors. The gap has been getting bigger since 2001 and will increase even further until at least the middle of this decade;
The lower charges are not at the expense of service quality:
These results show that on average government owned distributors provide slightly lower levels of service (more frequent and longer outages) than their privately owned peers.
It goes on to report that:
- Privately owned distributors are on average twice as efficient as government owned distributors; and
- the efficiency gap between private and government owned distributors has grown significantly over time.
The report’s first recommendation is:
The compelling evidence that privately owned networks in Victoria and South Australia have delivered superior outcomes for electricity users in those states should be considered carefully. Private ownership of the distributors in New South Wales and Queensland coupled with effective regulation will strengthen efficiency incentives and eliminate distortions attributable to these governments’ financial interest in their distributors. The best interest of consumers should take precedence over ideology.
Read the Energy Users Association of Australia’s full report: Australia’s Rising Electricity Prices and Declining Productivity: the Contribution of its Electricity Distributors