States should embrace reform -
it’s in their interest

Australian Financial Review

25th May 2006

Victoria has taken the lead on private sector infrastructure, writes Des Moore

At the Council of Australian Governments meeting in February, all state and territory leaders of Labor governments readily reached an almost unprecedented agreement with a Liberal Prime Minister on a national economic reform agenda designed to improve health and education outcomes, to increase competition in the energy, transport and ports markets and to reduce the regulatory burden on businesses.

So reform is supposedly in the air at all levels of government and the emphasis is on boosting competition.

But first, agreement will need to be reached - presumably at the COAG meeting next month - on intergovernmental action plans (IAPs) and the proposed independent body to report annually on progress.

Reforms will improve economic growth and hence government revenues, but who will meet the costs of compensating any losers from reform? Unsurprisingly, states argue commonwealth revenues benefit most, and the February communiqué of COAG indicated a preparedness to consider funding assistance to them once IAPs are developed.

The prospect of a slower growth in state revenues from commonwealth sources also indicates they will seek additional assistance. Initially, the GST was a bonanza for the states, with receipts increasing by 45 per cent – nearly 10 per cent pa - in the first four years to 2004-05. But projections in the commonwealth budget for 2006-07 are for only a 22 per cent increase in the next four years. With the GST and other commonwealth grants now providing around 45 per cent of total revenues, the states face the prospect of needing markedly to reduce the growth in their recurrent spending.

But governments can, and should, do much reform on their own without waiting for a COAG driven states-wide agreement. Indeed, it is in their interests to maximise the role of the private sector in the provision of services traditionally regarded as the responsibility of governments.

The line between the private and government sectors has ceased to be clearly defined because governments - and others- are increasingly realising the private sector can provide much of what have hitherto been regarded as public goods.

A deliberative policy of increasing the competitive environment for service provision can be implemented in two ways.

First, by further encouraging the expansion of private sector services that compete directly with government services, or by taking over of the public sector role where that appears likely to improve the efficiency and quality.

For example, since 1997-98 the proportion of students attending fee-charging non-government schools has risen from 28 to 33 per cent, and the million-plus students attending such schools in 2005 effectively save state governments, and thus the taxpayer, about $8 billion a year. A similarly large increase in the proportion of patients treated at fee-charging private

hospitals, up from 33 to 39 per cent in 2003-04, is saving over $9 billion a year.

In effect, the higher quality and the wider choice that modern society wants means users of private services are increasingly voting with their feet, even though they have to pay fees as well as taxes. [It pays governments to

further assist this process both financially and through reduced regulation].

Second, it can be implemented by acting directly to expose to competition the services provided by government, either through purchaser/ provider arrangements under which such services would actually be delivered by the private sector, or through public-private partnerships (PPPs).

Victoria has taken the lead in this approach by both contracting out to private operators, for example, some public hospital operations and by using PPPs for infrastructure projects such as the Casey Hospital [, the re-development of the women’s hospital and now the children’s hospital]. Victorian Treasurer, John Brumby, claimed at a Canadian conference in November last year that Victoria is leading the market for PPPs by, inter alia, establishing a national PPP forum amongst the states. But will his foreshadowing of a very big infrastructure budget on 30 May include more PPPs and the publication of hitherto missing cost-benefit analyses of projects, some of which have performed poorly?

So why is it likely to be in the governments’ interests, when an increase in the private sector's role will mean a smaller government sector? The answer is that the provision of services through a competitive framework will benefit the consumers of those services - that is, most state residents.

This is not a view confined to one side of politics. Federal Opposition finance spokesman, Lindsay Tanner, and Queensland Federal Labor MP, Craig Emerson, have recently highlighted the advantages of competition.

And because an increased private sector role offers potential for a lower level of taxation as well as better services, it is difficult to see that any government implementing a pro-private sector role would fail electorally.

The COAG agenda needs to include proposals for state governments to positively and comprehensively encourage private sector involvement across the whole range of government services. The Commonwealth should not provide additional assistance when it is in the states' own interests.

Des Moore is director, Institute for Private Enterprise. While in the federal treasury, his responsibilities as deputy secretary included federal-state relations. His recent report on the "Role of Government in Queensland" outlines an extended private sector role. [Sentences in square brackets deleted in published version]