The Case for Public Ownership of Infrastructure

May 8, 2008 by
Filed under: NSW Politics, Uncategorized 

Disclaimer: This post is not designed to be a conclusion, but to draw attention to a few things that I feel have been overlooked in the media. I am not a natural writer, so please forgive the structure of this post – I just want to get my ideas out.

The term Natural Monopoly refers to industries where it often considered impractical to have multiple providers. Utilities such as Railways, Power Lines, Water, Sewage and in the past Telecommunications have traditionally been called natural monopolies, but more and more, we see these notions being challenged.

Technological advancements such as Fibre Optic cables and spread spectrum wireless communication have opened up Telecommunications to many competitors, and there are few people who long for the days of Telecom Australia.

The establishment of the National Electicity Market in 1998 and the interconnection of all Southern and Eastern States (every state except WA and NT) started paving the way for private participation in Electricity generation. In NSW, all generators are still publicly owned at the moment.

The other utilities, more or less, still fit the definition of natural monopolies.

Funding
Goverments have a great advantage in that they can raise money by issuing bonds. Government bonds pay lower interest rates than enterprise would have to pay if they borrowed the money from banks or issued their own corporate bonds.

Funds can also be raised by issuing new shares via an IPO, but it likely to receive a cold response unless investors are convinced that there are realistic earnings expectations.

Hence, it is significantly cheaper for a government to fund the construction of expensive infrastructure.

Indirect Profits
Privatised infrastructure can only make money through the direct operation of the infrastructure, i.e. by pricing electricity, water or rail tickets at a healthy profit that is considered acceptable to shareholders.

With public infrastructure under government ownership, the government can still make a net gain, even if the specific infrastructure operates at a loss. If the infrastructure enables economic and population growth, it will lead to increased taxation revenue.

For example, a new power plant could increase the productivity of miners who extract metals from ore (indeed, BHP’s Olympic Dam mine in South Australia is expected to consume half of the state’s supply following its expansion).

New railways could reduce transport bottlenecks, easing labour movement, reducing unemployment as people are more easily able to get to areas with opportunities.

Profitability
Private enterprise wants profits from day 1, or at least as early as possible. There is little incentive for private enterprise to expand infrastructure to an area that is not currently experiencing growth, or may not experience growth for an extended period – e.g. 10 years.

As we have seen here in Australia, Telcos have been reluctant to provide service in the bush and the government has been forced to consider legislation to compell them.

In fact, this can worsen an existing situation where people will move away from an area with poor infrastructure and increase the burden on infrastructure elsewhere, leading to urban sprawl, traffic congestion. As someone who enjoys the convenience of working in the Sydney CBD and having a short rail commute from the East, I would not jump at an employment opportunity in North Ryde, for which I would need to buy a car, fill it up with expensive petrol and maintain it.

Operation of Infrastructure
I am not sure what is the best way for infrastructure to be operated, but here are my thoughts:

Operate Publicly
This is where the government is responsible for everything, including hiring employees. One could expect all the associated problems traditionally associated with government ownership, such as low productivity work culture, and frequent threats of union action.

Lease out the infrastructure to private enterprise
Potential private operators would issue tenders to operate the infrastructure for a given period of time, and would be responsible for day-to-day operation.

The advantage of this is that a bad operator can be evicted and replaced. The disadvantage is that the private operator has low incentive to improve the infrastructure. Any expensive upgrades or technological enhancements would have to be approved and funded by the government.

Other Issues
In order for Public Ownership to succeed, the following would preconditions would have to be met

  • We would need intelligent bureaucrats who know where to put the infrastructure
  • The bureaucracts would have to perform a sensible Cost-Benefit Analysis to ensure that there is a net gain.

Examples of poor analysis – the NSW Cross-City Tunnel and the Airport Link for which ticket/toll prices were considered unreasonably expensive by Sydneysiders. They were only patronised by a fraction of the expected number of commuters, and both facilities have gone into receivership.

Public-Private Partnerships
If handled correctly, these could possibly work, but recent history have shown the State Governments to be have been incompetent negotiators working against their constituents. Both the the failed NSW Cross-City Tunnel and the Airport Link were Public-Private partnerships.

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