Privatise and perish

Once upon a time in a land not so far away, the governments that supplied services actually controlled the services they supplied. The main form of transportation at the time, the railways, were known as the Government Railways because they were actually run by the government of the day. Governments also ran operations as diverse as airlines, electricity generation, water and sewerage concerns, public transport in larger cities, shops in remote areas, banks, telecommunications companies as well as education, housing, making roads, building government buildings and well, most of the services we believe the government provides from the taxes we pay.

Over the past 40 or 50 years, most governments in Australia have privatised a considerable number of the services they operate. In some cases, there is an ethical dilemma if a government is regulating an industry where they are also a large service provider. For example, the Australian Government at one stage owned Qantas (the flagbearer international airline) and TAA — Trans Australian Airlines (which became the domestic arm of Qantas). For years, there was a ‘two airline agreement’ where the government carrier and one publicly owned competitor split the domestic airline market between them. The market was regulated to the extent that a government body dictated to a large extent the schedules for each of the ‘competitors’, laying open the claims of a cosy duopoly where the only real choice was to ‘chance it with Ansett’ or ‘Try Another Airline’. Regardless of your choice the similarly configured plane for each carrier (the main differences being the upholstery and in-flight meal) would usually leave within 5 minutes of the flight operated by the other carrier.

History will tell us that various federal, state and local governments of all political colours ‘privatised’ assets in the last quarter of the 20th century. The federal government sold ‘our’ telecommunications provider and ‘national’ airline through a share float while allowing other firms to set up in opposition to the now corporate giants of Telstra and Qantas. Other governments either leased out or sold off water assets through a share float, or direct to the highest bidder, assets such as public transport, electricity generation and transmission, prisons, healthcare and many others.

The claim was always that private enterprise would run the business more efficiently and be subject to less regulation. While in some cases, it has proven to be true we don’t have the alternate universe that took the other option to run the comparison. This article from last September in Crikey would suggest that Jeff Kennett’s original plan for the Melbourne public transport system to be almost cost neutral just never happened. While cost neutrality probably wasn’t the main goal (ridding the system of most industrial award rights probably had a higher priority) to be fair, Kennett’s Government didn’t sell the tracks and infrastructure, just the authority to operate the tram and commuter rail systems. So, if the tram doesn’t turn up in Melbourne the commuter tends not to blame the government funding the system, rather they blame Yarra Trams. There has been no pretence or hiding of these buyouts, or franchises, or operating agreements. Let’s call the process overt privatisation.

There are probably good reasons for some of the overt privatisation events that have been completed over the past few decades in Australia and elsewhere around the world. Arguably, governments don’t need to operate commercially focused airlines, bus companies and so on. By the same token, some assets supply the community with essential services and privatisation of these assets conceivably is not in the long term best interests of the community as a whole. The company that purchases the essential asset from the government has to maintain supply to the community. They also have to make a return on the investment made by those that supply capital to the company, also known as shareholders. Realistically there are only a few ways of doing this.

They can reduce the levels of management which is probably not going to affect many people until something goes wrong and the remaining staff don’t have the skills and expertise to fix it. They can raise prices which is probably politically unacceptable as one of the customary justifications for privatising government assets is that the private sector is far more efficient than government in running business. They can work the asset harder, increase the timeframes between routine servicing or put off the replacement of infrastructure that is close to the end of its lifecycle which will work for a little while, but eventually the maintenance backlog will cost more to fix or will reduce the service to a level that is considered to be unacceptable (either according to the legal documentation around the privatisation or in the court of public opinion).

The far bigger problem with privatisation is when the government of the day choses to covertly privatise. As an example, the Turnbull government recently chose to bolster the capability of the NDIS to respond to telephone calls by recruiting more staff for the call centre, the problem being that these staff are not directly employed by the government, but by a large multi-national company named Serco who claim on their website to
specialise in the delivery of essential public services, with over 50,000 people working in defence, transport, justice, immigration, healthcare and other citizen services
According to NDIA (the government agency that runs the NDIS)
The decision would put the company at the frontline of the NDIS, interacting frequently with people with disability and service providers, many of whom are still grappling with a vast, complex and sometimes confusing scheme.

“Sourcing our contact centre services from Serco will give ongoing flexibility, responsiveness and value for money,” the NDIA said in a statement.
Disability groups were less welcoming, with Disability Australia’s Matthew Bowden suggesting
“We have no details on what expertise Serco have in providing communication services for people with disability, or why the NDIA has decided to outsource such a vital part of its services,” Bowden said.

“The NDIA needs to hire more staff and make their communication avenues with people with disability more transparent. Instead, they are offloading their responsibilities, and requirements, to deliver services to people with disability.”
If you think you have heard the name Serco before, you probably have. Not only do they provide staff for a number of public functions around Australia, including prisons and probably more infamously the Australian Government’s immoral if not illegal detention camps on Manus Island and in Nauru, they run a host of public services around the world including managing rail systems, the provision of non-clinical healthcare services and defence support.

This isn’t to suggest that Serco is any better or worse than any other ‘supplier of essential public services’, but there are risks attached. John Quiggin presented a laundry list of failures of ‘outsourcing’ or if we’re more honest, covert privatisation, in The Guardian during 2016. It’s an eyewatering list.

For each occasion that provision of services is ‘outsourced’ by a government, not only do we have to ask who commands the loyalty of the people employed to provide the service, we need to realise the government paying for the service provision has no control (except for a contract with potentially dubious dispute resolution procedures) over the service provided. To make matters worse, the government loses the intellectual capacity to provide the service with their own resources should something go wrong or the provision of the service by contractors become excessively expensive.

And things do go ‘pear-shaped’. The Saturday Paper recently discussed the case of Carillion, a company that operated a number of services for governments in the UK that went broke.
It turns out the company, which described itself as an “integrated support services company”, held about 450 government contracts when it fell over. The biggest part of the business was construction, but Carillion and its many subsidiaries were also involved in activities as diverse as providing school meals, maintaining military accommodation, prisons and rail lines, providing 11,500 hospital beds and even library services, among many, many other things.

When Carillion collapsed, it not only left tens of thousands of employees and subcontractors unemployed, it left a de-skilled bureaucracy scrambling to deliver services, and led to a lot of people becoming newly aware of the extent to which services they had previously thought were provided by government actually were not.
Australia is ripe for a similar market failure. Every service, such as running prisons and staffing call centres that is ‘outsourced’ or covertly privatised is reducing the number of public servants required to do the work, but they are also deskilling the organisation that is funding the privatisation. From the fee for services provided, the company managing the privatised service such as the NDIS call centre have to fund the training, supervision, management as well as making a profit.

Surely there is a point where the contractor performing the ‘government’ work has to charge more than it would cost the government to perform the work themselves. But by the time that occurs, the government has deliberately deskilled itself to the level where it can’t make the correct call and take back the service provision, so it has to pay.

The Saturday Paper goes on to discuss Australian governments (in general) implementation of ‘efficiency dividends’ where they require those that implement the services that we elect governments to perform to do more with less in an environment where the population (and service demand) is growing. The Abbott/Turnbull Government have also drawn a line in the sand for Public Service numbers — using the number of employees at the end of the Howard Government in 2007. Both policies are inherently illogical. We have a growing population, we as a community expect a higher level of service and we are restricting the ability of those we employ to provide those services to do their job. The Community and Public Sector Union suggests
Our conservative guess, based on available public information, is that there are at least 20,000 contractors or labour hire workers in the Australian Public Service.

“But it’s hard to be precise. The Australian Public Service commissioner could not tell estimates how many labour hire staff the Commonwealth has, because they don’t track it. They only look at direct public service employment, which is shrinking.
These 20,000 contractors are funding their own corporate structures, deskilling our governments and potentially leaving us wide open to service failures if one of the larger companies decides or is forced to no longer provide the service.

It may be a risk that Turnbull and his colleagues think is worthwhile, but the risk of failure is large, has already happened in the UK and could conceivably happen here. Do you want to take the risk?

What do you think?

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totaram

2/07/2018

I think you have glossed over the privatisation of prisons, which is the moist blatant example of a counter-productive exercise. If you are the owners of a privatised prison, how would you grow your business? All businesses to grow don't they? By ensuring that prisoners re-offend, by lobbying governments to institute more severe penal;ties for the smallest crimes, and so on. So, instead of seeing prison as an experience which tries to rehabilitate the criminal, the idea would be to ensure the prison population grows, by various means.  The success of such policies can be seen in the USA which has the highest proportion of its population behind bars. While this leads to wonderful profits for the privatised prisons, this actually depletes the coffers of the govt. and diminishes society. Isn't this obviously what will happen? How deluded do you have to be to believe that it won't happen? Yet, we have gone down that path, and there is no sign that we are going to backtrack.

I will have more to say on other privatisation issues, but the article is spot on and needs to be widely disseminated an discussed.

2353NM

3/07/2018

Thanks totaram,

I wasn't glossing over privatisation of prisons, its more that I have no direct or indirect experience and just never thought about the juxtaposition. It does make sense that if growth in the services provided is a typical economic indicator of the health of a service contract what on earth are they doing in prisons the idea is for the prison to reeducate offenders so that the offender never darkens the door again.

totaram

3/07/2018

2353NM: " the offender never darkens the door again."

Absolutely! And you have the evidence again from the Nordic countries. I can't be bothered but you can dig up the details. I think it is in Denmark that they are closing down prisons because of the falling prison population. And you can easily find articles on how the privatised prisons in the US use the inmates as cheap slave labour and make even bigger profits.



Ad Astra

4/07/2018

2353NM

If only our "private enterprise always does it better" government would read your salutary piece!

I have two politicians and add 2 more; how many are there?