Academic journal article The Economic and Labour Relations Review : ELRR

The Fiscal Impact of the Privatisation of the Victorian Electricity Industry

Academic journal article The Economic and Labour Relations Review : ELRR

The Fiscal Impact of the Privatisation of the Victorian Electricity Industry

Article excerpt

Introduction

The privatisation of the Victorian electricity industry is commonly regarded as a highly successful fiscal initiative, which rescued the Victorian government from a crippling level of debt, with an associated burden of interest payments. This view is supported by favourable assessments from, among others, the Auditor-General's office (Victorian Auditor-General's Office 1996, 1997).

A simple arithmetic-exercise, however, suggests that the fiscal benefits of electricity privatisation are, at the least, problematic. The gross proceeds from the sale of the electricity industry assets was around $20 billion. At an interest rate of 6 percent (equal to the real bond rate at the time of privatisation), the use of this sum to repay debt would yield an annual saving of $1200 million per year. The earnings (before interest and tax) of the State Electricity Corporation of Victoria (SECV) in its last year of operation before privatisation were $1202 million (SECV 1993). On this simple calculation, the short run impact of privatisation on the net income of the Victorian public sector was almost exactly zero.

Although a full analysis of the fiscal implications of privatisation must take many factors into account, this simple calculation is the appropriate starting point. Thus, although the sale price of $20 billion was higher than that expected by many observers, claims that privatisation was fiscally beneficial must rest on other grounds. Equally, claims that the Victorian community as a whole suffered losses from privatisation must be based on factors not taken into account in a simple comparison of interest saved and earnings foregone.

The object of this article is to present an analysis of the fiscal effects of privatisation, taking into account both information available at the time assets were sold and observations of subsequent experience. First, a range of fallacious arguments about privatisation, mostly based on the cash accounting system formerly used in the presentation of government budgets, are described and refuted. The appropriate economic basis for assessment of the fiscal and distributive effects of privatisation is described. Next, privatisation is assessed on an ex ante basis, comparing the proceeds of privatisation to the value of the SECV in public ownership under the assumption that trends in productivity, prices and outputs observed prior to privatisation would have continued in the absence of privatisation. This basic assessment is then modified to take into account the effects of the National Electricity Market, and the restructuring of the Victorian electricity industry. Some evidence on the performance of the privatised successors of the SECV is presented and assessed.

Debt, net worth, earnings and dividends

In assessing privatisation, it is important to take account of economic reality rather than accounting conventions. Under the 'cash' system of accounting employed in Australia until the late 1990s, the proceeds of asset sales were treated either as current income or as negative expenditure. Hence, a budget deficit could be converted to a surplus by selling assets. Such a procedure confounded the capital and current accounts of the government sector and was generally recognised as illegitimate by the early 1990s. An ad hoc solution was to develop measures of the 'underlying' deficit, excluding the impact of asset sales.

A more comprehensive response was the shift to accrual accounting, undertaken by Australian governments in the 1990s. The basic idea of accrual accounting was to separate current income and consumption from changes in holdings of capital assets, arising for example, from new public investments or the sales of existing assets. Under accrual accounting, asset sales are disregarded in determining measures of budget balance, except where assets are sold for more than their value in continued public ownership.

Although the idea that the proceeds from asset sales can be treated like current income has been generally recognised as fallacious, a more subtle form of the fallacy has influenced many assessments of electricity privatisation in Victoria. …

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