Kennett's power play not right this time
As Tony Abbott's self-described "infrastructure government" settles into office it can look forward to a tug of war with the states over privatisation.
At the Commonwealth level, there is not much left to sell. Australia Post and Medibank are the two leading contenders. The ABC and SBS have also been mooted, though these would be politically too tricky to privatise.
So the Coalition will be urging its Liberal colleagues in the states to jettison their electricity assets, their poles and wires businesses.
Jeff Kennett's success in offloading Victoria's power assets in the 1990s with the majestic price tag of $20 billion is the most often cited enticement for privatising in NSW and Queensland.
Yet things have changed. There are now two major obstacles to selling the state silver.
One, demand for electricity is falling and years of excessive investment mean asset write-downs are due. It is a tough job to sell anything, especially something so overcapitalised, in a climate of falling demand.
Two, the states are making a killing.
Just how much of a killing is nicely encapsulated in a report from AMP Capital, which accuses state governments of "triple-dipping" on their poles and wires businesses.
AMP's heads of infrastructure and infrastructure research, Paul Foster and Greg Maclean, have identified three areas where the states are cleaning up - and at the expense of businesses and consumers whose bills have doubled over the past five years.
First, states have enjoyed inflated returns thanks to the industry structure of regulated returns and the consequent "systemic overinvestment", as Foster and Maclean put it, in poles and wires. The dividends of "gold-plating", if you like.
Second, there is a "debt arbitrage" to be had. For instance, the AAA credit rating of NSW affords it "an immediate arbitrage opportunity between the BBB- debt margins on which the regulated returns are based and the AAA margins the state pays on its general purpose bonds".
Third, there is a tax lurk. The state utilities don't pay federal income tax but they do pay a notional income tax to the state under the National Tax Equivalent Regime. This, say Foster and Maclean, is in the order of the dividend generated by the regulatory process.
"This payment by itself effectively doubles the states' returns from the utilities and represents a major windfall to the states."
And, like the Demtel steak knives ad, there's more. Unlike most government services, utilities produce strong and reliable cash flows that are independent of market cycles.
These sustain the strong credit ratings and help the states borrow more cheaply to finance other things.
Thanks to this favourable tax treatment and their low costs of borrowing, the state enterprises can gear up. Ausgrid is leveraged to 80 per cent whereas the ASX-listed utilities business Duet is geared 60 per cent to 65 per cent.
The state enterprises don't require as much equity for their capital programs. On AMP's reckonings, their new capital programs are roughly two-thirds the cost of the private sector.
So there is no level playing field in the National Electricity Market between private and public operators and there is a substantial disincentive for NSW and Queensland to privatise.
Being one of the nation's top infrastructure investors it is no surprise the AMP report calls for privatisation but it says regulatory reform should be undertaken first.
As Liberal Party ideology holds dear the wonders of privatisation there may be some friction between Canberra and the states over this. Certainly, Canberra stands to benefit from privatisation as it can look forward to federal income tax (although it doesn't get much of this from its privatised airports and toll roads).
And the Kennett precedent - the huge one-off windfall from a sale - may not be sufficient inducement when the returns are comparatively so superior in owning these pipes and wires than in selling them.
Besides pointing to Kennett, privatisation proponents say consumers in Victoria are better off than in NSW and elsewhere because prices have not risen as much.
The real point, however, is that prices in Victoria have still risen too much, far too much, despite the fabled efficiencies of privatisation.
Since privatising in the 1990s, electricity prices have outpaced the rate of inflation, increasing by 170 per cent as opposed to a 60 per cent rise in the CPI.
Under the present industry structure, the regulator is still being "gamed" whether the poacher is a private entity or public.
From an environmental perspective, there is no case for privatisation. Victorian electricity remains the "brownest" in the country.
Incidentally, while the new government is taking the long-handle to Labor's green schemes, it is worth noting that, by and large, renewable energy policy has worked. The growth of wind and solar power, particularly in South Australia, has removed demand from the grid and driven down the wholesale price of electricity.