Damned if you privatise, damned if you don’t

Illustration: Eric Lobbecke.

There’s no law against ripping people off, Australian Competition & Consumer Commission chairman Rod Sims told a room full of journalists last year. The reminder stuck in my head because so many believe Sims and other regulators are there to stamp out gouging. They aren’t.

They enforce a narrow set of prescriptive laws to curb egregious market manipulation and collusion, at least that which can be proved in court. Apart from that it’s every man for himself.

In a recent Senate estimates hearing, Sims said this about banks’ anti-competitive home loan pricing: “It’s behaviour that benefits them and disadvantages consumers, but it’s not the beginning of a breach of the act.”

The release of the ACCC’s retail electricity pricing inquiry is the latest in a series of lessons in the pitfalls of ham-fisted regulation and misguided belief that privatisation leads to lower prices.

It leads to lower prices only when there is genuine competi­tion. Without that, prices will be higher and service quality probably lower. Fans of privatisation often claim regulators and government aren’t up to the task of running things efficiently — how then are they able to regulate the privatised entities appropriately?

A free market works only when prices are salient, products and services are understood by buyers, and there exist many suppliers (or at least the threat of many) who aren’t subsidised.

Perhaps we have a choice between laziness and greed. Government ownership encourages over­staffing, indolence and early knock-offs. Private ownership coupled with bad regulation encourages gouging, obscene remuneration for management and political disquiet among voters who perceive they are being ripped off. In many parts of the economy the idea of genuine competition is farcical. You can probably rule it out when the prime minister makes phone calls to the heads of electricity companies, ‘‘urging” them to do this or that.

Sims himself appears increasingly disillusioned. A few months ago he pointed out that Origin Energy, Energy Australia and AGL knew about the sale of dodgy energy plans but refrained from stopping them for fear of losing customers. “I rang up the chief executives and said: ‘Why don’t you stop this?’ They said: ‘We’d love to stop this. We think it’s terrible,’ but for the same reason they didn’t.”

His review of mortgage pricing among the big four banks found competition “more resembles synchronised swimming than it does vigorous competition”. There are reasons why the top 220 bankers at the big four banks earned $313 million in pay last year (and $324m the year before). The main one is the high levels of fat in the financial system.

The reality looks nothing like the textbook models of competi­tion. “Based on evidence we have collected, … not only does competition in the banking sector need to improve, but … where there appears to be competition it may often be illusory,” Sims says.

On Wednesday, Australian Prudential Regulation Authority chairman Wayne Byres noted how financial regulation rested on the assumption banks would be allowed to fail.

At the first whiff of strife they were protected in 2009, and always would be. “We’re trying not to take over the lending policies of the banks,” he said, remarks that further highlight the charade of “free-market banking”.

Prompted by community anger and the cost and quality of airports, the government has asked the Productivity Commission to look at privately owned airports. It points out airports with ‘‘market power”, which is pretty much all of them, can “skimp on the quality, range or efficiency of their services”. “Depending on how airlines and passengers respond to changes in charges and service levels, airports that exercise market power can reduce community wellbeing by reducing the number or level of services offered,” the commission says in its initial paper, released recently.

Sydney Airport setting a $4.50 charge in perpetuity for every taxi that picks up a passenger seems a shocking abuse. No government would get away with that.

Back to electricity. The fact $1.7 billion was wiped off the share market value off AGL and Origin, two of the big three “gentailers”, in the wake of the ACCC report shows how market value is a direct function of actual and potential regulations, not some innate ­genius of the firms’ management.

The idea of a free market in electricity provision is a bit silly in any case. It was good to see the ACCC encourage the government to subsidise the provision of ­reliable baseload power of some form. That is the only way prices will fall.

Blaming the so-called “gentailers” for gouging — the biggest three have 45 per cent of the market — is like railing against the sky for being blue: their legal purpose is first to maximise management pay and shareholder returns.

But government ownership is hardly a panacea.

Electricity networks in Queensland are less efficient than privately owned ones in South Australia and Victoria, where, by the way, government banks once went bust.

Privatisation may well be optimal for many utilities but only with heavy regulation. This will always be difficult. “Most regulatory agency employees follow brief public sector experience with more lucrative work at the firms they used to regulate,” write two economists at Harvard Business School and University of Chicago in a recent study that looks at how examiners at the US Patent and Trademark Office behaved in relation to applicant law firms they might like to work for in the future (at much higher wages).

Having looked at more than a million applications and thousands of examiners, they found the latter granted 18 per cent more patents to firms that later hired them.

“Examiners extend much of the leniency afforded to their future employers to other firms that are nearby,” they write, which suggests examiners were aiming for a particular location.

“Societal norms, tacit collusion or explicit agreements may pressure (regulators) to ‘go easy’ on their prospective employers, creating a conflict of interest for individuals tasked with protection of the public interest and impartial supervision of an economic activity,” they conclude.

The patents granted to firms that later hired the examiners ended up with 27 per cent fewer citations, signalling the damage to the wider economy.