Power Sell-off queries

If the Government does sell the state's electricity assets, lucrative returns will be lost. As might be expected from a natural monopoly, the three generators and three distributors slated for privatisation are extremely profitable. Net profits for the year ended June 30 last were $1.542 billion. That is an average rate of return on equity of 25.2 per cent per annum. Even that figure is conservative. If private sector accounting methods were used, returns could nudge 30 per cent. These profits will hardly be compensated by the fees the Government can charge for the use of poles and wires that are supposedly to be left in government hands.

There are other elements of the electricity privatisation inquiries that need questioning. Neither the Owen nor the Unsworth report presented a hard-nosed analysis of how much more electricity capacity the state would need, and when.

Instead they outlined a crude wish-list based on even cruder estimates of investment costs. For example, the Owen report cited the scary figure of $15 billion as the amount of extra investment needed, but if you look closely, this figure covered the cost of building no less than eight new power stations, retrofitting coal-fired generators and investing $2 billion in gas, yet the same report emphasised the need for only one more power station by 2013-14. It is clearly within the capacity of the state-owned energy agencies to fund the construction of one new power station. Indeed, they invested $1.8 billion in new plant and equipment in 2006-07.

By endorsing the sale of money-spinning investments, Owen and Unsworth have helped the Government avoid the hard work of ranking competing demands for investment and exploring how they might be funded. This is a cop-out.

It makes no commercial sense to sell off profitable businesses to fund other projects such as schools, hospitals and public transport. It may make political sense: governments have justified past privatisations on the basis that the proceeds will fund new initiatives that they hope will help them get re-elected.

So what are we to make of the sudden announcement that the Iemma Government plans a new metro rail system? Reports on how this initiative will be funded are conflicting. It has been variously stated that it will be funded by the capital works program, if electricity is privatised, or through public-private partnerships.

It seems unlikely that private investors would be anxious to invest in a long-term construction project like the metro, offering uncertain returns. All the more reason for the Government to retain its profitable money-spinning businesses so that its investments stay diversified and include some that produce stable, positive cash flows - particularly when public utilities like water and electricity provide basic services to the community.

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