Little glory in the struggle over NSW power - Ross Gittens, The Age Newspaper

You don't have to be very bright to pick holes in the arguments the NSW Government has been using to sell its plan to privatise electricity.

But it seems you have to be wiser than some of our brightest economists to comprehend the deeper issues.

Against the furious opposition of Unions NSW and many in the Labor Party, the Iemma Government is proposing to sell the state's power stations and the retailing sides of three distribution businesses.

Iemma and his Treasurer have argued that these businesses will need new investment of up to $15 billion over the next 10 to 15 years, which NSW taxpayers can't afford. They suggest that such additional borrowing could jeopardise the state's triple-A credit rating.

They further argue that selling off the electricity businesses would permit the proceeds — say, $10 billion — to be spent on much needed infrastructure such as a new urban public transport system and water and sewerage upgrades.

However, economists lost no time in blowing these arguments out of the water. 

The NSW Government has surprisingly low levels of debt, they say. Provided the looming electricity investments are likely to be beneficial, there's no reason the state shouldn't borrow to finance them.

Such borrowing probably wouldn't endanger the state's triple-A credit rating, but if it did, too bad. If the state needs to borrow more than triple-A permits, just move to double-A, which is still safe.

As for the line that the state must sell assets to provide the funds for infrastructure investment, that, they say, is nonsense. Provided these investments offer enough social return, there's no reason we can't just borrow the funds needed.

Well, yes, of course. But it doesn't seem to have occurred to my learned friends that they've been busy demolishing a straw man.

For a start, experience teaches that the arguments politicians advance publicly aren't necessarily those that persuaded them to try to push through an unpopular measure.

It's not easy for Labor governments to advocate privatisation — particularly with Labor increasingly becoming the party of the public-sector employees — so it's hardly surprising to see them falling back on debatable arguments.

Let's turn the question around for once: why shouldn't electricity be privatised? Because it's a natural monopoly?

No. Iemma is not proposing to sell off the one part of the industry that is a natural monopoly: the power transmission and distribution networks.

Since the establishment of the national electricity market in the late 1990s, we have had a competitive market for the generation of electricity and its retail marketing.

Next question: what is the appropriate role of government? I'd say it's to do all those things the market can't do well because of various market failures.

Governments shouldn't be doing those things the private sector can do just as well, if not better.

Since the advent of the national electricity market, there is no longer any good reason for a government to stay in generation and retailing. It should focus its (clearly limited) attention on doing well those things that only it can do.

Some of the arguments we've been hearing against privatisation betray no clear thinking about what governments should or shouldn't do. Some argue that the NSW Government should retain its investment in the industry because it is highly profitable, or because the asset it sells today will be worth more in 10 years' time, or because the Government should be seeking to maximise its net worth.

Really, why? Why should governments be in the business of making profits and getting bigger for the sake of it? And, if so, why doesn't Iemma buy BHP Billiton while he's at it?

Actually, these arguments are just attempts to rationalise a case no one is prepared to put, but which punters and Laborites find highly appealing: preservation of the status quo. Once the Government has started doing something, it must never stop doing it.

There's no logic to that. In theory, it's a recipe for infinite growth in the public sector; in practice, it would mean neglect and inadequate funding for many of the things governments should be doing.

Finally, no one wants to say it but the strongest reason for privatising electricity is so the electricity unions can't use political pressure on Labor ministers to get at their employers.

Why do you think the NSW unions are fighting so furiously to block privatisation? Because they're desperately afraid they'll lose their soft cop.

From: http://business.theage.com.au/little-glory-in-the-struggle-over-nsw-power/20080316-1zs1.html.