Dozens of governments have embarked on the pathway to electricity deregulation and privatisation since the mid-1990s. It has become the accepted wisdom amongst governments and opinion leaders despite the consequent price rises and disasters that have followed in its wake: the series of blackouts that have been experienced from California to Buenos Aires to Auckland; the government bailouts of electricity companies that have been necessary in California and Britain; the need for electricity rationing in Brazil; and the fact that it has become too expensive for millions of people from India to South Africa.
Electricity deregulation and privatisation is referred to as ‘liberalisation’ by its advocates who use the term to disguise what is in essence a massive shift of ownership and control of electricity from public to private hands, in the name of economic efficiency and in the cause of private profits. ‘Liberalisation’ has meant that maintenance teams that were once fully staffed have been dramatically cut leading to frequent equipment failures. It has meant that privately owned electricity conglomerates are able to blackmail governments into bailouts and high prices with threats of blackouts. And it has meant that the planning function of electricity authorities that once ensured adequate generating reserves for times of peak demand, and kept infrastructure up to date in developed countries, have been abandoned to market forces. Because of market forces electricity prices are based, not on the cost of production, but on how desperately consumers want electricity and this has led to sky-rocketing prices whenever private companies have been able to limit supply in times of high demand.
The privatisation of electricity is not something that citizens have demanded nor wanted. In general, there has been very little public participation in electricity reform decisions and as the consequences are observed, there have been many bitter protests against electricity privatisation. Popular uprisings have occurred in Argentina, India, Indonesia and Ghana. Protests have halted privatisation proposals in Peru, Ecuador and Paraguay. In the Dominican Republic several people were killed during protests against blackouts imposed by privatised companies. In South Africa thousands marched during a two day general strike to protest privatisation, which they labelled “born-again apartheid”. In Papua New Guinea students were killed when thousands rallied against the planned privatisation of government services including Elcom, the electricity authority. Even in China, workers protested the sale of a power plant in Henan province to a private company and threatened to “block the state highway and lie on the railroad while the trains run over us”.
So why are governments around the world ignoring public opinion? How have governments been persuaded that electricity is just a commodity that should be traded in the market place like pork bellies, rather than an essential service that needs to be controlled and supplied by governments to ensure its availability, reliability and affordability?
During the 1970s business interests promoted a combination of neoclassical economic theories and economic or market liberalism (referred to as neoliberalism). Its basic policy formula involved government spending cuts, privatisation of government services and assets, and deregulation of business activities; all in the name of free markets, competitiveness, efficiency and economic growth. This formula, sometimes referred to as the Washington Consensus, was adopted willingly in many developed nations and imposed on developing nations by the World Bank and the IMF as conditions of their loans.
The Washington Consensus placed an “exaggerated faith in market mechanisms” for solving economic problems and it gave economic goals priority over social goals, destroying socially beneficial traditions and desirable aspects of cultures in the process. Government social services have been decimated. In the end the responsibilities of governments are likely to be reduced to little more than law and order and national defence.
The public sector was broadly characterised by right-wing think tanks and neoliberal economists as “bloated and inefficient”. Publicly-owned and state-regulated electricity monopolies were claimed to be so wasteful and inefficient that private companies competing in a free market could save enough money to both cut prices and make a profit. But the supposed inefficiency of publicly-owned electricity providers was often unfounded rhetoric used to gain and maintain private control. It was belied by the cumulative evidence of one hundred years of electricity provision all over the world. Publicly-owned electricity enterprises have consistently provided electricity at no greater cost than privately-owned enterprises and often for prices that were far less than those charged by private companies.
One of the first countries to adopt market-oriented reform was Chile when General Pinochet ousted the democratically-elected Marxist government of Salvador Allende in 1973, with the support of the US government. Britain followed suit in 1990. Both Chilean and British privatisation were experiments driven by business interests and shaped by a mix of neoliberal dogma and, in the case of Britain, pragmatic politics. Yet they became models for countries that followed.
The rise of Thatcherism in Britain can be attributed in large part to the endeavours of two think tanks, the Institute of Economic Affairs (IEA) and its offshoot, the Centre for Policy Studies (CPS) founded in 1974 by Keith Joseph and Margaret Thatcher. The CPS published Privatize Power in 1987 which accused the Central Electricity Generating Board (CEGB) of being inefficient, inflexible and secretive. It recommended the separation of the CEGB into generation, transmission and distribution companies. This is what eventually happened in Britain and in countries that followed suit.
In 1979 Margaret Thatcher thought her party’s privatisation plans to be too controversial to mention in the election campaign. However many businessmen were persuaded that government supplied services such as electricity were too expensive because of inefficiencies and because of the social goals that they pursued, such as equity and employment. They believed that the lack of competitiveness of government providers made private industry uncompetitive too.
Deregulation in the US was primarily driven by business interests; in particular, industries that used large amounts of electricity and wanted to be able to reduce costs by doing deals with competing suppliers, and private power companies that wanted an opportunity to make profits from the electricity business previously monopolised by the regulated utilities. For the same reason aspiring electricity traders (who buy power from generators and sell it to consumers and to electricity retailers) also lobbied vigorously for deregulation. The most prominent of them was Enron.
The Center for Responsive Politics points out that “during the first six months of 1996 alone, energy interests spent at least $37 million to lobby Congress and federal agencies on deregulation”. In addition, millions of dollars were spent on “research, polling, television advertising and laying astroturf—developing grassroots organizations”. Most of it was aimed at decision-makers—politicians and bureaucrats—rather than the majority of electricity consumers.
The case for deregulation could not be presented in self-interested terms to the public. It had to be presented as being in the interests of the wider public. Groups such as the large industrial energy users utilised the language of free-market advocates to state their case in terms that were not too obviously self-interested. The neo-conservative think tanks provided that language and marketed the concept of deregulation as being in the public interest. The business media also played an unquestioning part in promoting deregulation.
A plethora of corporate front groups and coalitions were formed to promote deregulation including the Alliance for Competitive Electricity, Citizens for State Power, Electric Utilities Shareholders’ Alliances, the Alliance for Power Privatization, and the Coalition for Customer Choice in Electricity. Americans for Affordable Electricity coordinated the campaign for deregulation and spent $4 million a year on it on top of what each of its members spent. For example, Enron spent $25 million in just six months and allocated $200 million a year for advertising to win customers and “to persuade Americans to demand faster deregulation”. It also spent many millions more on political donations and lobbying state and federal politicians.
In Australia, privatisation was also driven by business interests and the think tanks they funded. During the 1980s neoliberalism was promoted by business groups, which saw government reform as a way of reducing their taxes, increasing investment opportunities and, in the case of the reform of government enterprises such as electricity, as a way of decreasing the cost of infrastructure provision to themselves.
Businesses were aided in promoting privatisation and deregulation in Australia by a network of government and industry-funded research institutions including “the Industries Assistance Commission, the research arms of the Treasury and the Department of Finance, the Bureau of Agricultural Economics, Industry Economics and Labour Market Research”.
During the 1980s the expansion of electrical infrastructure in developing countries had been financed by government borrowing from abroad because of a shortage of local capital. Debts built up because local consumers could not pay high enough prices to pay off those loans. In the 1990s, because of the high debt levels, the development banks stopped lending developing countries money to develop their own infrastructure and encouraged them to rely instead on foreign investment. The trend towards the private sector financing and construction of electricity generation has increased around the world.
The major international lending banks and development agencies have all promoted a policy prescription for developing countries that includes privatisation of state-owned enterprises and liberalisation of access for foreign investment in those enterprises. This policy prescription has benefited banks, multinational corporations and international financial institutions, often at the expense of local business, and always at the expense of the poor. In Africa such ‘assistance’ has caused a 23 percent drop in incomes. In Russia it has caused national production to be halved.
International financiers are also helping promote privatisation. Instead of loaning money to third world governments they now loan the money to foreign investors to construct and operate the infrastructure in developing countries. In this way independent power producers (IPPs) are financed and the electricity produced is then sold to existing state utilities who distribute it to customers. This is seen to be a first step towards privatisation.
During the 1990s almost US$187 billion of private money flowed into the energy sectors of 76 developing countries, as a result of World Bank and IMF liberalisation and privatisation policies. Today in developing countries the private sector is “an important financier and long-term operator of infrastructure activities” including electricity. The projects of the ten largest investors accounted for over a third of all investment in this sector.
Foreign investment is supposed to provide developing countries with much needed capital. However, the extent to which this foreign investment makes additional capital available for infrastructure development is questionable. Where full privatisation has taken place, as in Latin America, foreign direct investment (FDI) is increasingly going into mergers and acquisitions of existing enterprises rather than financing new investments and infrastructure. In fact between half and two thirds of FDI worldwide consists of such mergers and acquisitions.
This has also occurred in Asia since the Asian crisis. “In 1998, for example, while total FDI flows to the five Asian countries affected by the crisis declined by $1.5 billion, cross-border M&A in those countries is estimated to have risen to more than $3 billion.” Mergers and acquisitions enable foreign corporations to take advantage of a crisis situation when local share prices and market values are down. Much of this activity has occurred in the services sector and is associated with privatisation programs. “Similarly, new commercial bank lending – albeit on a much smaller scale – is being used to restructure existing external liabilities rather than invest in new plant and equipment.”
In the case of Independent Power Producer (IPP) projects new infrastructure clearly results from foreign investment. However, the amount of money invested is small compared with the amount of money paid back by local utilities, often in foreign currency, money that then leaves the country. For many IPP projects, foreign investors only put up, on average, 24 percent of their own money. The rest is obtained through loans, mostly from foreign banks and agencies. IPPs expand capacity at a very high cost that in fact increases government spending and foreign debt, inhibits competition, blunts technological innovation and increases consumer costs.
Privatisation is good for the banks because the money raised by the asset sales helps governments to pay the interest on their debts, at least in the short term. It is also good for multinational corporations because they are able to buy profitable government assets and have more opportunities to sell their products and services into new markets, often with heavy tax-payer funded subsidies. However, privatisation of services such as electricity have led to more unemployment and increasingly unaffordable prices, often without improving the quality, capacity or reliability of the electricity system.
Brazil privatised its electricity system in 1995. It was purchased by a complicated web of foreign private investors including Enron, which alone spent over $3 billion in Brazil buying up existing infrastructure. Brazil was once admired and envied for its plenitude of cheap electricity made possible by harnessing wild rivers but in 2001 this system broke down. The heart of the problem was the British model upon which Brazil had structured its privatisation. Consumers experienced massive price rises while the foreign owners repatriated profits and avoided investing in new generating capacity.
India, like Brazil, was pressured to privatise its electricity by the IMF and the World Bank. Enron used its political influence with US embassies and the CIA to win a $3 billion contract to build the Dhabol Power Plant south of Bombay in 1992. This was the largest foreign investment in India. Locals protested the environmental and social impacts of the project whose electricity was both unreliable and heavily polluting. It charged so much for electricity that the state government ended its agreement to buy the electricity in June 2001 and the plant was forced to shut down.
Electricity privatisation and deregulation have all the elements of a successful confidence trick. The deception or trick has involved persuading the public and the politicians who represent them, that a dramatic alteration in the governance of their electricity systems would be in the public interest. Electricity consumers were promised electricity rate cuts, better service and ‘consumer choice’ as a result of the competition that deregulation would foster. Governments were promised reduced budget deficits and less responsibility for an increasingly complex and capital-intensive service sector.
Governments, entrusted with carrying out the will of the people and protecting public assets, have been coopted by all manner of devises, ranging from the sophisticated persuasion of well-funded think tanks to the less than subtle pressures exerted by international lending organisations, all combining with frequent and generous financial contributions to the campaign funds of political parties and offers of future career opportunities for retired politicians and bureaucrats.
As a result there has been a massive transfer of ownership and control over electricity assets worldwide from the public to private companies. The companies that have taken over electricity provision in most countries are multinational companies with little interest in the welfare of local citizens. Increasingly these companies are concentrating—through mergers and acquisitions—into a small group of very large conglomerates that dominate national and international electricity provision. Electricity restructuring and privatisation has also resulted in massive job losses. In Australia alone, employment in the electricity sector fell “from about 83,000 in the mid-1990s to today's 33,000 workers...”
It is clear that the vast majority of people in each country where the great electric confidence trick has been played are its victims rather than its beneficiaries. Jobs have been lost, electricity prices have risen, service and reliability has fallen, pollution has increased, and taxpayers have had to bail out private electricity companies in bad times without receiving any dividends in good times.