Is Australian privatisation making the economy less efficient?

Australian Competition and Consumer Commission chairman Rod Sims has stated that in his view many Australian privtisations have made the economy less efficient and led to prices in those markets being higher, not lower.

Privatisation is a supply-side policy and takes two broad forms, one is removing rules from a market (called deregulation) and the other is where government owned corporations are moved to private ownership (denationalisation). Denationalisation is usually accompanied by the breaking up of the monopoly power of the organisation concerned by allowing new firms in to compete with it. A classic case is in telecommunications where Telstra in Australia and BT in the UK had monopolies on providing phone services before privatisation.

The aim of privatisation from an economists perspective is to move the market back to one where increased competition drives down costs and so increases allocative and productive efficiency. Allocative efficiency is provided by firms trying to better meet the wants of consumers. 

Successful privatisations lower the barriers to entry (often through deregulation and denationalisation together). In addition to the efficiency gains there are also improvements in productive capacity, increasing the level of Aggregate Supply. 

Governments have another motive in privatisations. They want to raise money. They can use the money to cut taxes (popular) or reduce government deficits or debt. Rod Sims is accusing the government of putting this motive in front of the others and as a result harming the interests of consumers.

A classic case is the sale of Medibank health insurance. The Abbott government shamelessly allowed premiums charged by health insurance companies to rise quickly prior to privatisation to make the potential profits look more attractive and drive up the share price.

The Sydney Morning Herald covers the story here

This article has interest to both IB and VCE students. IB students will recognise it as an example of how poorly planned privatisations can create private monopolies and work against consumer interests and failing to deliver the hoped for gains. VCE students can use it as an example of supply-side policy and a legitimate criticism of such policies in Australia.