(c) Copyright 1998 Graham Strachan
The term ‘privatisation’ involves two different sorts of activities, one of which is unobjectionable, the other definitely objectionable. The nature of the first is used to conceal the nature of the second.
(1) RE-PRIVATISATION of businesses nationalised in the days when socialism was supposed to be good, but which should never have been part of the public sector in the first place. These include firms like the Jaguar company and Rolls Royce in Britain. The re-privatisation of firms such as these is unobjectionable, because their products are not essential services, and there are usually alternative products available.
(2) PRIVATISATION OF PUBLIC UTILITIES which were never part of the private sector, and were never regarded by genuine free market economic theory as profitable propositions for the private sector. These were always regarded as proper for the government to run, and include services such as power systems, water supply and sewerage systems, health services, and the like. People must have these essential services. They have to be available to rich and poor alike as a matter of social policy, which is why they were always regarded as the proper province of government.
There is nothing objectionable about the private sector entering these fields in competition with governments, but if there is infrastructure involved, such as telecommunications networks, hospitals, rail networks, and power grids, and the government divests itself of these things, then it can no longer ensure that social policy objectives can be met. Apart from that, the control of services essential to the functioning of the society are transferred from public to private control, frequently foreign private control, which is unaccountable to anyone as to its exercise. Such power should never be in private hands.
PRIVATISATION PROPAGANDA
If there is a propagandist’s rule of thumb that says ‘a good lie can be recycled indefinitely’, the field of ‘privatisation’ must be a prime example. When Margaret Thatcher began privatising once-nationalised British industries during the early 1980s the myth was invented that they were being bought up by the employees. It was dubbed ‘popular capitalism’. The Readers Digest described it as ‘Karl Marx's dream (workers owning the factories) coming true’, yet instead of revolutionary socialist governments, ‘it was free-market privateering governments who were making it a reality’. According to this theory, North Sea Oil is owned by the oil rig workers.
The same stunt had been pulled in America previously. Michael Tanzer, writing in the book ‘The Sick Society’, referred to it as the “widely ballyhooed ‘people’s capitalism’” While it was boasted during the early 1970s that 30 million Americans owned shares in corporations, proving that ‘everyone was a capitalist’, Tanzer referred to authoritative studies which showed that 40% of all the corporate stock in the entire country was owned by just 75,000 individuals.
The idea that Britain’s nationalised industries were snapped up by the ‘workers’, or that Australia’s ‘privatised’ public utilities are now owned by ‘the mums and dads of Australia’, is pure privatisation propaganda which has been used repeatedly over the years. When the editorialist in the Sydney Morning Herald following the Telstra float wrote, “We are all capitalists now, with 1.2 million Australians buying about $8 billion of shares in Telstra”, she was merely echoing well-worn slogans.
Sometimes even propagandists get carried away with their craft. The Australian editorialist predicted the dawn of the millenium, stating that “the implications of a shareholding Australia” might “be seen by historians as one of the more important sociological developments in Australia in the last decade of the 20th century....[and] involve repercussions across the life of the nation, touching the future of the trade union movement, the shape of welfarism and even specific policy outcomes on matters such as the care of the aged and the young.” Really.
The idea that privatised companies were sold to their employees is a sham. Certainly some employees bought stock, but ordinary people grow tired of being speculators and sell their shares. Not only that but they have a habit of dying and leaving their shares to others who then sell them. The private human being lacks the perpetual succession of the corporation. Furthermore, ownership of shares in the expectation of making a bit of a profit is distinct from going to shareholders’ meetings and exercising voting rights, even by proxy. Ownership does not necessarily imply control.
Whatever the case, privatised corporations are soon owned and controlled by global big business and finance.
THE PRIVATISATION BUG
Privatisation began in earnest in 1984 Britain sold the Jaguar car company, nationalised by the British government in 1975, back to ‘private investors’. In no time at all the whole world was privatising. Between 1985-88 over 50 countries had adopted some form of privatisation. The trend embraced governments of all ideologies from capitalist to socialist and even communist."
Brazil sold off a dozen state-owned companies in 1986, and listed another 77 to follow.
New Zealand sold its majority holdings in oil and gas producer Petrocorp and New Zealand Steel Ltd, raising a total of $1063 million.
Between 1985 and 1988 Mexico sold 85 state-owned companies and put another 66 up for sale, including its national airline.
Over the previous 3 years Japan had sold off its telephone system, and national railway.
The French government was selling $28 billion worth of nationalised assets...26 enterprises.
The reason for it all was said to be the ‘sudden realisation’, after 50 years of Keynesianism, that ‘most state-run enterprises were white elephants’, and needed to be propped up with tax subsidies [something unobjectionable in the case of public utilities]. “Many of the industries nationalised by the socialists in 1982 will be returned to the private sector.”
One immediately sees the two fundamenatlly different types of organisation being lumped in together: private enterprises and public utilities. The lie is that if privatisation is good for one, it must be good for the other also.
PRIVATISING PUBLIC UTILITIES
Nothing in genuine free market economic theory requires a government to sell off public utilities. To quote Adam Smith himself, "...those public works which, though they may be in the highest degree advantageous to a great society are, however, of such a nature that the profit could never repay the expense to [private enterprise]."
Professor Hayek makes it very clear that public utilities need not be confined to the armed forces, the police and law courts. "Far from advocating such a 'minimal state', we find it unquestionable that in an advanced society government ought to use its power of raising funds by taxation to provide a number of services which for various reasons cannot be provided, or cannot be provided adequately, by the market."
Hayek then identifies a "wide range of such wholly legitimate activities which, as the administrator of common resources, government may legitimately undertake." These include sanitary and health services, water supply and general roads, and other essential services.
Even the Australian bible of economic rationalism, The Hilmer Report, concedes that “The ownership of a business is not of itself a matter of direct concern from a competition policy perspective”. In other words privatising a government-owned corporation or public utility will not in itself increase competition. Not only that, but it is likely to be detrimental to the public interest. Privatisation converts a goal of ‘service to the public’ into a goal of ‘profit regardless of the public’, which will almost guarantee there will be price rises, as there always are in practice. So privatisation is of no benefit to the public. Even if ‘the mums and dads shareholders’ buy some of the shares, purchase by a few of what used to belong to all is not ‘public benefit’.
Privatisation cannot be justified on economic grounds either. The Hilmer Report concedes that rail, electricity, gas and water utilities account for less than 5% of GDP. Even if (and there’s no guarantee) a 25% improvement in economic efficiency could be achieved through privatisation, the overall return to the taxpayer would be insignificant. ‘Filling black holes in the budget’, while a clever invention by Treasurer Costello, is not the real reason either. The policy of privatisation was well under way before the Howard government even came to power. It was recommended by the Hilmer Report in 1993.
Professor Hilmer, having failed to give any sort of credible reason for the sale of Australia’s public assets and utilities ended up saying the following: ‘In recent years there has been a WORLD-WIDE TREND in favour of transferring ownership of hitherto public businesses to the private sector’ [and even though there is no apparent benefit to the public] ‘Nevertheless there is evidence that privatisation MAY increase the efficiency of MANY businesses, WHICH IS CONSISTENT WITH THE OVERALL GOALS OF COMPETITION POLICY’. In other words, the assets have to be sold because the policy says they have to be sold.
PUBLIC vs. PRIVATE OWNERSHIP
Jack Keavney, an Australian private Quality Control Consultant and believer in private enterprise, makes a valid point: there are some industries where national interests are served more cheaply and efficiently by a publicly-owned enterprise, for example: where it would drastically waste national resources to duplicate the basic infrastructure. Examples are roads and water, electricity grids and the telephone network. He was also uncomfortable with the possibility ‘that Australia’s telephone network might be owned by anyone but Australians, to see it subject to the vagaries of the stock market, or operated by business barons at home or abroad, or to international politics or any other interests beyond our ultimate control.’
PRIVATISATION OF TELECOMMUNICATIONS
The fact of life in telecommunications is that long distance calls are profitable, while local calls are not. Government monopoly phone companies, as Australia’s Telstra used to be, operating on a ‘service’ not ‘profit’ motive, have long cross-subsidised the local phone services with revenue from long distance operations. This has met the social policy objective that in the modern era, everybody should have a telephone, rich or poor, including people in remote areas. [In Australia these were called Community Service Obligations (CSOs) and Telstra was required to meet them].
On the other hand about 80% of long distance calls are business calls. The aim of ‘privatisation’ then, is to get the telecommunications carrier out of government hands so that cross-subsidisation can be abolished, the cost of business calls can be reduced, and profits can be made out of the public by hiking the price of local calls. Win, Win, Win, for big business. Lose, lose, lose for the public who invariably pay more for their local calls, and some of whom will be unable to afford the cost of a phone at all.
Private firms (unless they are a regulated monopoly) by their very nature do not use cross-subsidies to provide universal service. Boards of directors claim quite legitimately that it is the responsibility of governments to achieve national social objectives, not theirs. Fine, but to do so a governments need to own a telecommunications network. Once it sells it, how are the social objectives to be achieved? The short answer is, they’re not. When the phone system is privatised, many low-income households are forced to drop off the system.
TELECOMMUNICATIONS: THE AMERICAN ROAD
Until 1984, America’s telephone system was dominated by a large private monopoly, American Telephones and Telegraphs (AT&T), commonly known as the Bell System. It worked fine. During the 50 years preceding the 1984 breakup, the real price of telephone services had actually gone down 60%.
Then on January 1, 1984, the Bell System was broken up following an anti-trust (anti-monopoly) suit and ‘privatised’ in the interests of ‘greater competition’. AT&T was made to divest itself of its 22 operating companies. The cost of the divestiture itself exceeded $1 billion, in legal and consultancy fees, all of which had to be paid by the consumer, who of course had no say in the matter. The breakup of the Bell System has come to mean two things: confusion and higher rates.
The first result was that telephoning became more difficult. AT&T had provided an environment in which all services, long distance and local inter-connected freely with each other, making telephoning easy. After 1984 there were 1,200 separate operating companies, each of them with different prices, some with universal access, some without. Telephoning in the US is now so complicated that consumers have to receive a constant stream of material explaining a ‘bewildering array of changing rates and services’.
In telephoning across the country numerous companies may be involved. Even to call Monterey from San Francisco (about 100 miles), involves 3 companies. There are State Regulators as well as the Federal Communications Commission. Regulations and prices differ from state to state. Different states permit varying degrees of competition. The cost of regulating this ‘privatised’ system are enormous, and a special adminstrative giant, the Federal Communications Commission (FCC) was created just for that purpose.
Before privatisation AT&T had applied ‘cross-subsidisation’: long distance calls, which were more profitable, were used to subsidise local calls, which were less so. This was to achieve social policy objectives, not profit maximisation. Although it was a private monopoly, AT&T accepted the economic burden of cross-subsidies as condition of its being granted monopoly status. After privatisation the FCC embarked on a ‘radical new pricing programme’ to reduce the cost of long-distance calls, 80% of which were made by business, and to charge it to private calls.
Where once business subsidised the consumer, now the consumer was to be made to pay so all businesses could have cheaper long distance calls, while some businesses had a new profit opportunity in the local-call telephone industry. Win, win, for business.
Between the breakup in 1984 and 1990, local call charges had risen by 46%, more than double the rate of inflation. On the other hand long distance rates had been reduced by 40%. Says Keavney, ‘One immediate consequence of freer competition, then, was the creation of a telephone Trojan Horse. Industry and Federal Regulators had concealed an intended assault on residential charges in favour of pricing policies from which businesses have been the main beneficiaries....[worldwide] that was the universal result of network competition.’
Summarising the American situation in 1990, Keavney said: Despite the 1,200 companies now operating, the US does not have true competition at all. Despite all the fuss and cost, AT&T still carries the bulk of the long-distance traffic. If competition had led to anything it was greater variety in pricing rather than cheaper calls and new services.
LIFELINE
To deal with the people for whom a phone was now too expensive, a taxpayer-subsidised scheme called ‘Lifeline’ was introduced. But to qualify, at least in some states like Texas, recipients had to be over 65, living below the poverty line, and disabled. Even so, the scheme was not working. Nobody wants to know about welfare programmes in an economically rationalised society.
By the end of June 1989, only 23 states out of 50 had been certified to provide the services, and recipients had to go through a complex, stigmatising process in order to quality for benefits. Not surprisingly, dispersing $42 in benefits to a household cost $70 in administrative costs in states such as Maryland. By 1990, of the 11 million people who should have been getting a phone under the scheme, 3 million had no phone at all, 6 million were still paying normal rates, and only 2 million were receiving relief.
DIVERSIFICATION
With deregulation there is nothing to stop the operating companies diversifying into areas unrelated to telecommunications. ‘Business Week’ estimated that in 1985 the Regional Companies spent $1.2 billion acquiring real estate, financial services, software publishing companies and the like, at the risk of neglecting their basic function, and using monopoly telephone revenues to cross-subsidise competitive activity. That was 1985. Since then the number of outside ventures has escalated out of sight.
BRITISH TELECOM
The British did in 1984 what Australia has done since, or partly so: privatised their publicly-owned carrier (British Telecom), and licenced a competitor (Mercury). According to Margaret Thatcher it was going to give the British public lower prices and higher quality, and to give the employees and public shares in the enterprises (the old ‘popular capitalism’ and ‘mums and dads shareholders’ sell). These objectives proved to be mythical, of course. The employees failed to buy enough shares to be decisive in influencing company policies. Ultimate power ended up in the hands of relatively few institutions and individuals.
To oversee the ‘competition’ the Office of Telecommunications (OFTEL) was created. Again, the competition was not real, but limited and regulated competition at best. Bureaucrats would still decide how it would all work in practice. Again the cost burden was shifted onto residential users as the companies concentrated on the lucrative business market at the expense of residential services.
All sorts of handicaps were placed on British Telecom, including the requirement that it provide universal service at standard prices. Mercury could pick and choose the services it regarded as economically viable, namely the business subscribers. This meant that the majority of citizens still had to deal with a monopoly for their telephone services, and gained no benefit at all from ‘competition’. ‘Cream-skimming’ by Mercury was built into the British Government’s version of network ‘competition’.
Faced with this handicap, British Telecom was forced to raise the cost of its residential services. Residential users now bear the burden of skewed competition. Local calls in the UK are considerably higher than in Australia. British household telephone users are paying more so a business minority can pay less.
The point is: jettisoning the ‘service’ motive of the public enterprise and replacing it with the ‘profit maximisation’ motive of business dramatically changes the priorities. Keavney raises two questions, though in different words: (1) Are profit objectives compatible with national (social policy) objectives? (2) Should something as vital to social and economic policy as the telephone network be in private hands?
He concluded that as at 1990, ‘privatisation’ of the British system had resulted in higher prices for most users, inequitable distribution of the economic and social benefits, and no quantitative evidence of improved quality.
CANADA
Most Canadians were happy with their ‘phone service and did not want it privatised. Tough. It was to be privatised anyway. Economic rationalism has nothing whatever to do with democracy. According to Jack Keavney, ‘A dogma-driven government wanted it....and big businesses wanted it.’ He almost had it right. Big businesses wanted it, and a big business-driven government wanted it. The ‘dogma’ is there for the show, to give the general public the impression the government meant well but was ‘driven by dogma’, a ‘dominance of economic ideology over empirical evidence’. The reality is that governments in debt have no other choice but to do what they’re told.
A Report prepared by a task force found evidence that privatisation would result in lower quality service for people in low-density, high cost areas due to decreases in maintenance and system investment, and higher rates relative to subscribers on more profitable routes attractive to competitors. This was based on the actual experience in the US and Britain. A union official hit the nail on the head when he said, ‘The biggest players....major banks, oil companies, etc.,...want lower long distance rates, competition, etc., with little regard for the public’s concerns.’ The winners will be 10% of Canadians, primarily large business users of long distance services.
THE NEW ZEALAND EXPERIENCE
Between 1988 and 1993, New Zealand led the world in the sale of state-owned assets to overseas investors, mostly transnationals. Some NZ $14 billion worth of assets were sold off . The ‘reforms’ were described by Economist Magazine as ‘out-Thatchering Mrs Thatcher’.
The people were told it had to be done to make the country ‘more attractive to foreign investment’. There was nothing attractive about the results. Stripped of almost all subsidies and import tariffs, and forced to compete in a global market dominated by immensely more powerful actors on a far from level playing field, whole sectors of New Zealand industries were decimated, with thousands of jobs lost. The voice of New Zealand big business, the Business Roundtable, and the economic rationalists within the Treasury were held up as being the true visionaries of society. Tax cuts for the rich were accompanied by social welfare cuts for the poor. The public sector was ‘restructured’ according to market principles. The country's financial, media, transport, and communications infrastructure was turned over to private/transnational hands.
By 1996, an estimated 20% of New Zealanders lived below the poverty line. A 1995 Joseph Rowntree Foundation study found that among 18 comparable countries, between 1979 and 1995, New Zealand had the fastest growing income disparity. The seemingly never-ending takeovers by transnationals did nothing to improve New Zealand's overseas debt problem. In 1984, total private and public foreign debt stood at $16 billion. By 1996, it was $74 billion - despite a decade of public asset sales and takeovers.
Such cold realities were carefully glossed over in all of the hype surrounding free trade, but Maori Treaty activist and lawyer Annette Sykes attributed them to what she calls ‘the socially abhorrent principles of the structural adjustment programme’ which had been imposed on New Zealand for over a decade. The promises made about the ‘colossal’ and ‘remarkable’ benefits for the country arising out of the Uruguay Round and APEC came to nothing. New Zealanders were told to ‘leave it to the market to decide’, and that the benefits of GATT will ‘trickle down’ to the people. Said Ms. Sykes, “In reality, trade and investment liberalisation regimes like those promoted within APEC open the way for the sucking up of lands, lives and resources by corporations which cynically promote a destructive model of development which knows no limits in its lust for profit.”
PRIVATISATION AND ‘GLOBALISATION’
The two main arms of economic rationalism are ‘deregulation’ and ‘privatisation’. The purpose of deregulation is to force smaller nationally-owned businesses to compete with huge multinationals on a ‘level playing field’ in which the stronger cannot lose, the ultimate effect of which is to wipe out independent national economies. This is part of the ‘globalisation’ process: the political and economic integration of all the countries of the world into a global order.
The purpose of ‘privatisation’ is to transfer ownership and control of all publicly-owned assets, including essential services, out of the ownership and control of national governments into the hands of internationalists. There is to be no Australian-owned national economy, and the fraudulent policy of ‘privatisation’ is one of the ways the Australian government can assist the engineers of ‘globalisation’ to achieve that goal. Again the language of ‘free market economics’ is used to conceal the real nature of the ‘globalisation’ process.