Letter from The Cape Podcast Episode 19 November 24, 2023 Hello and welcome to another episode in my Letter from The Cape podcast series, where I talk about Modern Monetary Theory or MMT as it applies to the real world challenges and problems. In the 1980s and 1990s, governments at all levels went hell to leather selling off the public enterprises that we all, collectively owned. Rudyard Kipling appears to be the first person to add leather to the C16th term hell-bent in his 1889 story - 'The Story of the Gadsbys' - when his character, the Captain, urged the understudy Gaddy, to ride his horse Bingle fast because "It'll do you good". Well the privatisations in the late C20th only benefitted the wealthy investors who purchased the public assets. Us consumers were promised cheaper, higher quality services, delivered more reliably by corporations who 'knew what they were doing'. They knew all right - the dollar signs in their eyes were huge. There was a real binge feeling in the air with lawyers, management consultants and other 'rent seekers' lining up to get the millions that the governments paid out to make sure the sales went through. The 'privatisation industry' was hugely profitable to all the hangers on who made hay from the sell-off process. Governments also discounted the value of the enterprises heavily so they would easily sell and they would not be embarassed by a lack of private demand. This was after they told the public that there was a huge thirst for private investors taking on these assets. There was a thirst - but it was because the sale prices were ridiculously low and the investors knew they would be making a huge profit just by breaking up the enterprises. Now, some 3 decades later we know that the hype was all fiction. The services provided by transport, water, electricity, telecommunications and more, which were all previously so-called natural monopolies in public ownership are highly priced, of lower quality and are less reliable, than they were when in public ownership. The privatisation binge morphed into the PPP era - the so-called Public-Private Partnerships, where governments relinquished their responsibilities to build essential public infrastructure that not only supported a sense of public good but also underpinned the prosperity of the private market economy. The term PPP covers a wide variety of collaborations between the public and private sector. A familiar model that has been used frequently in Australia since the early 1980s involves provision of infrastructure such as toll roads which is argued to provide infrastructure more quickly than by public provision which is subject to government-imposed budget constraints. This arrangement ultimately transfers the cost of infrastructure to users with associated negative distributional impacts. A PPP is a contractual partnership between the public sector and the private sector to finance, construct and / or operate projects which would normally be the responsibility of the public sector. The proponents of PPP arrangements argue that they offer value for money entailing: (a) Lower construction costs; (b) Lower operating costs; and (c) Higher quality services. People often suggest that PPPs could never be better because the private sector has to price its debt in the market whereas public debt prices at the long-term bond rate. There is typically a 3-5 per cent difference between private and public funds, which means that the PPP can never be cheaper unless services (employment) are cut dramatically or construction quality reduced. However, PPP proponents respond by saying that the difference in borrowing rates reflects project risk, which is transferred from the public sector (they say the 'taxpayer') to the private investors. Therefore, PPPs are constructed by the advocates as an efficient transfer of risks from public to private. The different financing costs just reflect that the private operators are now bearing the risk - or so the argument goes. The argument is spurious. The real problem with the PPPs is that the risk never shifts from the public to the private sector. We know that a private corporation can go broke and then its product and service exits the market. But with an essential public service such an exit is impossible. So, if the private partner defaults, the government always has to pick up the pieces. There is no real risk transferred. PPPs just mean that the government outlays more than previously for a private provider to make profit, when previously, there was no need to make such a surplus. Why should the public purse guarantee corporation profits? This week, a study into the privatised electricity market was published and it showed that network companies are making huge profits, well beyond those deemed by the regulator to be reasonable. The report noted that it was a failure of the regulatory system to discipline the private companies that allowed these profits to be made. Meanwhile, we enter another Summer with the threat of blackouts due to underinvestment in the network infrastructure. From the private company perspective, why invest in improvements when the government allows the company to gouge consumers and make massive profits for doing nothing much? Meanwhile, the higher electricity prices feed into the CPI and the RBA sees it as an excuse to push up interest rates further and push more people out of work. This is a failed system. And why did they do all this? Simply because the Federal government claimed it did not have the funds to meet the capital needs of their public enterprises. That simple justification lay at the heart of all of the mess that has been created in the last 3 or so decades. And, of course, it was a lie. The federal government is not financially constrained in its spending and could have maintained effective investment rates in all of its public enterprises and funded the same in the state enterprises. The fact that it didn't just transferred billions of public money to the wealthy investors, many of whom do not even live here. I will be back next time. Until then, see you later.