Exposing political and union rhetoric

Phil Ruthven considers the role of government in business and explains why Australia must work harder to increase profitability and productivity.

One of the founding fathers of post-independence US government believed running a government was something that should be done after a normal day’s work. It was also thought that governments had no business being in private sector business. But over the centuries that followed, the US, and almost all other nations, do in fact, have governments that own businesses. But the question remains, should this still be the case in the 21st century? 

Governments in Australia, at all three levels, own and run businesses across 22 per cent of the economy. This is a big share. It was significantly more before the privatisation of banks, airlines, telecoms, ports, some of the utility firms, all of their manufacturing entities and many others.

Indeed, in the early years of European settlement, almost the entire economy was made up of government-owned industries. So in Australia’s case, government ownership has fallen to just over a fifth of GDP over the past 227 years.

Government ownership

The grey and white coloured divisions in figure 1 show the industries in which our governments own businesses in 2015. Some have only a minority share of the industry or outsource operations, and some have 100 per cent ownership of an industry.

These industry divisions total nearly 42 per cent of the economy, but governments control just over half that (22 per cent) whether in the form of government business enterprises (GBEs) or general government education solutions (GGEs) such as schools and museums.

But why did governments get into business, rather than simply sticking to governing the nation and its society and economy? There are several reasons:

• Independence and security (public administration, defence, justice, police).
• National good (schools, health, public transport, other infrastructure, arts, parks).
• Community sensitivity (postal services, savings banks).
• Insufficient private capital access and/or low and slow returns (utilities, telecommunications).

The last two of these reasons are no longer applicable. The community sensitivity issue no longer applies to postal services, which are now being outsourced or privatised, along with banks, which are now also all privatised and competitive. Similarly, capital markets are now very capable of raising any amount of capital onshore and offshore for private enterprise in any industry.

And yet, strangely, some Labor Governments still support the notion that government assets are the “peoples’ assets” or “sacred cows”. This was witnessed in New South Wales for decades and in the recent Queensland state election. This is, of course, voodoo economics and jingoism, with collusion from the union movement. Utilities such as electricity, telecommunications and railways began life as GBEs because our capital markets were not mature enough to be able to provide the big capital that was possible in the US.

It is not surprising that unions favour government ownership as that is where most of their members are situated. The biggest membership is in health, education and the public service, but membership has fallen from around 55 per cent of the workforce more than 50 years ago to an expected 15 per cent or less in the second decade of this century. It will probably fall further to single digits as we enter our third decade, so there is a strong rearguard action in play.

Governments are usually not very good at governing anyway, let alone running businesses. Analysis by IBISWorld has suggested that at the federal level, only one in four leaders since 1788 have been outstanding statesmen; the rest being ordinary, dysfunctional and if not, hopeless. State governments may have been marginally better. The same applies for local government.

With power comes the opportunity for corruption; and this problem has been manifest in both local and state governments and unions up to the present day.

To obviate this ever-present danger, a lot of government enterprises have become risk-averse, stolid and unproductive. This is not a good mix.

Profitability and productivity

This leads to the question of profitability and productivity. Governments would have assets of over $2 trillion in Australia in 2015, earning pre-tax surpluses of approximately $35 billion, yielding around 1.7 per cent on these assets: an extremely lazy return. 

Of course, the vast bulk of these assets are associated with not-for-profit (NFP) enterprises, but even many of the GBEs have poor returns by private sector standards. Does this have to be the case? Is it not possible to provide services at equal or lower costs and still make a reasonable return? Should universities be sitting on $60 billion in assets, with revenues of less than half that investment ($28 billion) earning just a several per cent return on net assets, with fees rising all the time?

That said, three of the 100 most profitable enterprises in Australia over a five-year period to financial year 2013, were government entities, with an average return on net assets of a staggering 49 per cent. But this is only three in 100.

The picture in the productivity arena is not pretty either. Over a five-year period to 2014, the nation’s productivity growth averaged 1.4 per cent per year. That is, output per hour worked by the nation’s workforce increased by that amount each year. This means that by the end of that period, an hour of work yielded over 7 per cent more than in 2009. The only worrying performances in the private sector were mining (which turned positive in 2014) and manufacturing (which was impacted by the overvalued Australian dollar and blow-torch competition from China). 

However, the NFP/government share of the economy went backwards at 0.4 per cent each year, suggesting that at the end of five years, the output per hour worked by government employees, mostly, was 2 per cent less than in 2009.  Economists generally agree that measuring productivity in the services sectors of the economy is a bit woolly, but not so much that the above comparison does not stand up.

Then again, there are some outstanding examples of government- owned enterprises with efficiency and courtesy, including Centrelink. Nevertheless, it is time to revisit the old chestnut of government ownership in terms of its justification. We have witnessed a huge amount of privatisation over the past quarter century, and an equally large amount of outsourcing (IT, delivery/distribution and even production). 

The nation needs more of this to further improve its productivity growth, particularly given the enormous competitiveness in our home region, Asia-Pacific, where over two-thirds of our trade takes place.

We need to work our assets much harder in terms of profitability and improve the systems and productivity in the unionised workforce. We do not need jingoism to get in the way of necessary progress. Political and union rhetoric needs to be exposed for what it is.