Economics, Energy, Governance, Nation Building

The benefits of privatisation of essential services are questionable

 

Private enterprise is primarily concerned with maximising profits, to increase the returns to shareholders; which makes the shares more attractive and increases the share price. This increases the value of the company concerned. The bonuses and remuneration paid to the company’s CEO and other executives are often based upon the profits and company’s share price. This drives the company towards the sole goal of increasing profits and its value through its share price.

With essential services, the maximising of profits often involves a reduction of maintenance expenditure, costs and investment in its infrastructure, particularly when infrastructure upgrades does not provide a significant boost to the company’s profits. Typically, existing infrastructure is allowed to run down, this can cause problems with reliability, which we have seen in many essential services that have been privatised.

According to Climate Institute chief executive John Connor: The main driver of recent power price increases and coming power price increases is the cost of the poles and the wires that haven’t been invested in for some time,” (1)

Public ownership of essential services can benefit from profits being reinvested to upgrade infrastructure, leading to lower price increases to consumers.

Since privatisation of essential services, consumers have experienced the biggest and more frequent price rises; compared to when such services were owned by government and the people. Hence, the benefits of privatisation of essential services, for the consumer; are questionable.

Also, profits can be a source of income for governments, leading to the reduction of taxes. In other countries, such as Singapore: the government owns the telecommunication and airline companies.

Telstra’s four billion dollars annual profit, if it continued to be in public ownership, could have been a source of revenue for the government: and made the Government less reliant on raising a carbon tax to meet budget shortfalls.

Governments less dependant on revenue are less likely to sell off the Country’s assets

If Telstra was still owned by the government, its profit could have been reinvested to building a fibre optic network. Thus avoiding blowing out the budget, growing further our long term debt and reducing our interest payments.

It is not commercially viable to roll out a fibre optic service to the majority of households, otherwise Telstra would have done so. Now that Telstra is a private company, the Government is required to pay billions of dollars in compensation to Telstra; to utilise the ducts that currently carry the cooper network to people’s homes. Telstra had indicated that they had planned to use the compensation to build their own fibre optic network in capital cities – where it is profitable to do so and undercut the Government’s National Broadband Network (NBN): thus making the NBN commercially unviable. (2)

 The Government is in a difficult position to enable a fast broadband service to the majority of Australians given that private companies would seek to undermine its plans and build a rival network that undermines the goal of having a fast internet service to the majority of Australians.

Telstra will need the high speed (fibre optic) network as a backbone to support Telstra’s new 4G wireless network. Whilst the Government will be replacing the aging cooper network with (state of the art) fibre optic cable, why is it that we will also have to pay billions of dollars compensation to Telstra to roll out the NBN?

Consumers are expected to continue to see significant increases in charges for essential services, such as electricity and water; as significant investment to maintain and upgrade aging infrastructure have been largely ignored by privatised companies. This is most evident in the electricity network, as in excess of $30 billion will need to be spent in the next five years, rising to $50-60 billion by 2020. (3)

This raises the question about the benefits and shows the pitfalls about privatising essential services that could have been better if they remained in public ownership.

Links:

(1)  http://au.finance.yahoo.com/news/Carbon-tax-scapegoat-power-abc-1017678752.html

(2)  http://www.abc.net.au/news/events/national-broadband-network/telstra-analysis.htm

(3)  http://www.rebuildingthenation.com.au/utility/the-balancing-act-%e2%80%93-keeping-energy-affordable-while-reducing-emissions

 

Picture source:  http://herinst.org/BusinessManagedDemocracy/government/privatisation/business2.html

 

 

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