Arising from neoliberalism’s obsession to not just analyse the world in market terms, but to make the world into a market, governments in Australia and elsewhere have privatised or outsourced a range of services which had previously been provided by government departments or authorities. South Australia followed this ideological venture in a range of areas, but in this post I simply want to focus on two examples: social service provision and the electricity distribution network.

While the two industries are obviously different, in both cases there was an attempt to mimic or impose market discipline where there was no competition and no real market. Social services are a government monopsony where service users are not the customers so the theoretical link between utility, market demand and price is broken, while energy distribution networks are a natural and legislated monopoly.

Much could be written about the structures and regulation of the “markets” that were established, but I want to focus on just one aspect: the inconsistency in the treatment of profit. This treatment has consequences for social service delivery and energy prices, and ultimately therefore, for equality.

Social Services

The provision of social services, such child and family support, financial counselling, community health, housing and homelessness support, addiction help, and disability services are an essential part of a government’s role in a modern society. But the neoliberal vision and the potential to cut costs by outsourcing services to organisations with lower pay or less regulation led to the creation of pseudo-markets where charities and not-for-profit (NFP) organisations (and some private companies) periodically bid for government tenders to provide services. The successful tenderer is then contracted to provide services at the agreed price, with the government apparently happy in the knowledge that the competition between tenders has ensured value for money.

There are some good reasons for government outsourcing of some social services (and much hubris in relation others), but the treatment of the cost of services and profit in the South Australian government contracts is curious. The government holds most of the cards in any contract negotiation, and generally does not allow for an operational surplus in a contract price. Further, given that the government pays for service provision in advance, it wants to ensure that the money is spent on the services it paid for. And so, the standard SA government contract with NFP service providers has a clause (10) allowing the government to require repayment of any advanced funding which has not been expended in a given year. While there is flexibility for the government not to require repayment, some departments aggressively pursue such repayment.

At best this is a lop-sided contract, with one party (the government) agreeing a price for the provision of a service, and then reducing that price if the service provider manages to make savings – even though the service has been provided as agreed. Despite government rhetoric of outcome-based approaches, the clawing back of unexpended funds is completely input-focused.

However, the ramifications are broader because the lack of operational surpluses and the claw-back of funding means that NFPs struggle to find surpluses to build robust balance sheets and invest in organisational sustainability and development. It is then no surprise that the sector is characterised by an under-investment in technology (as reported in multiple annual surveys) and by short-horizons with a reliance on the next government contract to maintain staff and services.

To be clear, the fact that organisations are not-for-profit does not mean that they can’t lawfully or shouldn’t make a surplus on any service or in any year – it simply means that any surplus has to be put back in to the organisation and can’t be allocated to members as a dividend or other profit distribution. However, the contractual limitations on building and keeping such operational surpluses is detrimental to the sustainability of NFPs and stops them providing more and better services to the people who rely on them.

Electricity Distribution

The pseudo-market created in energy distribution is quite different. By contrast to the government monopsony in social services, the energy companies who bought the privatised energy networks operate in a more standard business framework with the cost of services being paid for by energy consumers (accounting for about 40% of energy bills). However, because the networks have monopoly power, their operations are regulated by laws which limit the aggregate revenue they can get from consumers.

As I have noted in a previous post, the calculation of this aggregate is complex and contested, but it is theoretically based on the cost of service provision, including an agreed rate of return on capital (i.e. profit) – with the regulator determining what costs and profit rates are appropriate.

This allowance of a return on capital contrasts to social service provision in that an agreed rate of profit is viewed as a normal cost of service provision – a cost not usually allowed in NFP contracting (noting that, in theory at least, both have separate allowances for administrative overheads). The result of this is that these private companies can accumulate profit to re-invest to build the company and to distribute to shareholders in a way that NFPs can’t.

However, the difference does not stop there. As I have reported previously, the Institute for Energy Economics and Financial Analysis has produced reports highlighting the “supernormal” profits energy distribution companies have made when their actual costs have come in below the costs agreed by the regulator. In 2022, this amounted to $199m for SA Power Networks and around $2bn across all network providers nationally. While the differences in estimated and actual costs may be factored into future regulatory determinations, this money is not immediately clawed back by the regulator or consumer – indeed, there is a whole incentive scheme built in to the cost calculation to encourage such cost-savings.

A Modest Proposal

There is no doubt that NFP service providers would love to be able to keep their operational savings and surpluses to reinvest in their organisation and services, or even to have an incentive system which mirrored that which enables energy networks to benefit from cost savings.

For governments to be consistent, they should either allow NFP service providers to retain profit (i.e. money not spent when they have provided the agreed services) as per the energy regulation, or force energy networks to refund to customers the above-regulated profits when their costs of service provision are lower than the regulated amount. Energy network owners would still be better off than social service NFPs as the former would still get their guaranteed return on capital, but in relation to the unexpected savings and surpluses, it is a simple proposition that what is good for the goose is good for the gander. But such outcomes are about power (of the political economic kind), not policy, and I suspect in this case it is energy consumers who will continue to be plucked.