Are government-owned enterprises inherently inefficient?

The reaction to such ideas, which even the Financial Times canvassed in a recent striking article, has so far been made up of nothing more than glib statements by our political class.

A proposal for the state-owned Queensland Investment Corporation, which manages $80 billion in assets, to buy into an insolvent Virgin Australia was dismissed by Home Affairs Minister Peter Dutton as "laughable."

In a recent speech on the future of manufacturing, Federal Industry Minister Karen Andrews similarly declared that the Coalition was not considering government ownership of industry, as "history has clearly shown the folly of that approach."

That approach is certainly not alien in Australia.

We have learned a great deal about best-practice public sector governance from experiences, both successful and less so, with Australia Post (formerly the Postmaster General's Department), Telecom Australia, the Commonwealth Bank, numerous airlines, the Australian Broadcasting Corporation, the Future Fund, the Clean Energy Finance Corporation, NBN Co, Snowy Hydro, and state government operations ranging from electricity commissions to butcher shops.

These experiences show us there are many ways government ownership can be realised. The most appropriate model will depend on the characteristics of particular businesses, as well as governments' appetites for risk and return.

A number of basic questions can be asked of any government ownership regime - but perhaps the most common question is whether government businesses are inherently inefficient.

When people claim government businesses are inherently inefficient, they are talking about businesses that can continue operating while running at a financial loss, even if the maximisation of public shareholder value is their default directive.

This raises two questions: what is meant by inefficiency, and relative to what?

When businesses are immune from financial losses, the argument goes that there can be a temptation to overinvest. Consumers and taxpayers are likely to bear the costs. Think of government-owned electricity network businesses overspending on poles and wires just as the demand for electricity fell. Now imagine similar errors in aviation, mining, banking, or manufacturing.

In short, government ownership regimes are prone to wastefulness.

The electricity sector example is a little forced. The root of the problem could be addressed by governments setting closer to at-cost prices and accepting lower returns. The challenges of this approach are unlikely to be any more severe than those faced in the current regulatory regime.

The general counterclaim is that private businesses operating under real competitive market pressure are unable to overinvest for very long. Yet even the Reserve Bank's inflation risk indicators acknowledge that this rests on another form of waste. Namely, the existence of underemployed labour (which now comprises around 20 per cent of our total workforce) and equipment.

The flipside is that government ownership regimes are better able to fully mobilise available labour supplies. Indeed, trade unions are often quick to emphasise the jobs that could be saved through nationalisation.

It is unclear whether the underemployment of productive resources required for market discipline can be checked against the potential waste generated by public-sector overinvestment.

Now there is no convincing justification for the public sector offering exorbitant perks such as jobs for life in the same business. There is a strong case for allocating labour as efficiently as possible, so that society can produce as much wealth as it can.

This can be aimed for without using markets. In many school systems, teachers are employed by education departments rather than individual schools, and can be flexibly moved around. The same approach can be used to shift other employees from redundant to newly prioritised roles in the public sector.

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Would public sector workers have an incentive to work hard with this full employment backdrop?

At one level, any worker will be tempted to take longer lunch breaks and smokos if they have an opportunity. But diligent colleagues, managers, and customers all place social pressure on serial slackers.

And given that pay rates are unlikely to ever be set completely equal, it is hard to see any real basis for a motivation slump.

Likewise, there are in reality a number of ways public investment discipline can be imposed short of the prospect of bankruptcy and liquidation.

Most bluntly, acts of parliament can prescribe explicit limits on capital expenditures for government businesses. Requirements above these limits can be approved by the relevant minister, independent government authorities, or a parliamentary vote.

Threats of demotion for recurring poor performance, and the reputational damage this can inflict on managers interested in building their careers, should not be underestimated.

International trade can also act as a competitive check on government-owned businesses, subject to national interest considerations as already occurs through the Foreign Investment Review Board.

A related inefficiency argument holds that government business decisions are vulnerable to politicisation. This again only makes sense in relative terms. Most of us have witnessed private sector job vacancies being filled by some friend or family member of the boss. Various national football associations, run as private businesses, have been accused of making bribes within FIFA - a private body. Are these not instances of politicisation?

A more realistic approach is to treat politicisation as ubiquitous and harness mechanisms, including arms-length governance, bipartisan board selection, parliamentary accountability, and direct democratic controls, to shield government businesses from such biases when they are likely to undermine due diligence and public confidence.