Desperate NSW Government’s Latest Money-Raiser: Privatising Prisons
Our desperate, cash-strapped and clueless NSW State Labor government have come up with another great money-raiser: selling off prisons, to be run by private companies. NSW prison guards went on a day-long strike to protest plans to privatise Parklea prison.
I can think of no better way to increase corruption in our prison system, reduce the quality of care and completely eliminate any transparency. Privately run prisons are a disaster in the USA and they will be a disaster here.
Any private operator will have one objective – to make a profit at all costs. One can expect rehabilitation and training programs to be scaled down, if not scrapped altogether. Also, prisoners will likely be used as slave labour to undercut local businesses who have to pay their employees a proper wage. Furthermore. cases of abuse (of prisoners or guards) are likely to be covered up with a reduced public ability to investigate.
My message to our incompetent state government – learn to use money to add long-term value to our economy and infrastructure, not liquidate public assets for crappy short-term band-aid solutions.
NSW State Government – Worse than a Desperate Crack Addict?
Filed under: NSW News, NSW Politics, Sydney News, Uncategorized
In a predictable move, the NSW state government, led by Nathan Rees, has cancelled several major rail infrastructure projects – namely, the North West Metro and the Richmond Line duplication, which has been ‘deferred‘.
These had been promised for many years and are needed to cope with the growing population in these areas. Housing has become highly unaffordable in inner-city Sydney, so people were encouraged to move to the outer areas in the expectation that the these Government transport projects, when completed, would be able to take them to their places of employment in the inner city.
The government of course states that these projects, which they previously claimed to be ‘fully funded’, have to be abandoned due to the budget ‘black hole’ created by the financial mismanagement of the past NSW Labor governments led by Morris Iemma and Bob Carr, and the global financial crisis which has led to reduced tax revenue.
Despite having cancelled these projects, the NSW government is desperate for cold hard cash and is prepared to sell all the public assets they can at any price. The latest assets up for sale are the electricity retailers, NSW Lotteries and Waste Services NSW. These are all profitable and income-generating.
One major reason cited by the state government for refusing to borrow money for infrastructure is that they want to maintain their ‘AAA’ credit rating. Correct me if I’m wrong, but isn’t the whole purpose of having credit ratings in the first place to allow reliable borrowers to obtain loans on good terms?
Now is the perfect time for the government to spend borrowed money. NSW is in recession and the economy needs to be stimulated – capital works projects have been historically effective in these situations.
Reviving the cancelled infrastructure projects will remove bottlenecks and lead to increased taxation revenue and economic growth. As we are are now in a higher inflation environment, the net present value of future loan payments will keep falling, reducing the future costs of servicing these loans.
Furthermore, keeping those public assets will ensure that their income is retained, and this income will of course reduce the burden of loan repayments.
The Case for Public Ownership of Infrastructure
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.
Privatisation is Not for Everyone
We’ve been hearing a lot about privatisation lately with the Iemma government’s determined plan to privatise the NSW electricity sector (Iemma powers ahead with electricity sale) despite widespread opposition within his own party.
I personally oppose the creation of private monopolies. Consumers realise no benefits from capitalism without the presence of healthy competition.
Another event took place that is likely to steer this debate further:
Today in the media, it was reported that the New Zealand government reached a $555 million deal with Toll Holdings to nationalise its railways. They were originally government owned, but had been privatised in the early 90’s under a previous government.
According to the article, under private ownership, the railway lines have been poorly maintained and many services reduced or cancelled, so the government saw no other option but to repurchase.
