Finally, the Privatisation Pendulum Swings Back.

Part 1, The UK.

Paul Sweeney09/11/2018

Trends in Economics

Trends in economics swing one way and then back. The privatisation trend that begun in the 1980s in the UK is finally swinging back. It is the Tories - not radical Labour under Corbyn - that is reversing privatisation.

 

Yes the UK Tories are now renationalising their railways, prisons and ending Private Finance Initiatives (PFIs.) Privatisation was a costly experiment which has failed in most of Thatcher’s objectives.

 

Thatcher did not mince her words, describing “privatisation as one of the central means of reversing the corrosive and corrupting effects of socialism.”

 

But former her predecessor, Tory Prime Minister Harold Macmillan perceptively described Thatcher’s privatisation as “selling off the family silver” in 1985.  This statement struck a cord - for the very good reason that it turned out to be largely correct.

 

Even the Media now is recognising the failings of privatisation

The country which was the global front runner in privatisation is rethinking how to run its public services” said the Financial Times recently. It continued, “once the leader in selling off utilities, many in UK now think investors have run rings around regulators.”

Even the right wing Daily Telegraph admitted the railways performance “is politically embarrassing for the Government, which has repeatedly defended the private franchise model for the railways” last month.

20 UK prisons are also to be renationalised by the conservatives though they call them “step ins.” The private firms simply cannot run them competently.  

The collapse of outsourcing and builidng firm Carrillion, which I addressed here did not help the privatisation case.

Finally, the UK National Audit Office (NAO) had been excoriating of PFIs for years. In Budget 2018, the Tory Government finally decided to kill PFIs off. The Government has decided “the PFI and PF2 models to be inflexible and overly complex’. Chancellor Philip Hammond said that ‘I have never signed off a PFI contract, and I can confirm today that I never will’, denouncing the risk they had exposed government to and the high cost to the country. At least this is honest, if long overdue. There was much whinging from the finance professionals at the unexpected decision. Hammond claimed “90% of them were signed by the Blair-Brown government”, perhaps indicating one reason for the collapse of European Social Democracy.

 

Three years ago when Labour promised to re-nationalise many utilities (rail, water, energy in UK), it was not taken seriously. But today polls show a massive 76-83% of people support for re-nationalisation of utilities.

 

Thatcher’s Objectives for Privatisation.

Margaret Thatcher’s primary objective under the Ridley Report was to shrink the state by selling its public assets. It would then use the capital for day-to-day spending and so cut taxes. Other objectives were to create a shareholder democracy; to have much more efficient firms; to have cheaper services and goods; to smash the power of trade unions and to create opportunities for investors.

 

Billions of public assets in the UK were privatised. Hundreds of billions in public assets all over the world have also been privatised as right wing or lazy governments followed the UK in gaining easy money to keep themselves in office with tax cuts. Between 2000-2007, OECD found $498bn in public assets had been privatised worldwide. 4.4% of France’s which received the highest sum at $98bn were privatised, with as much as 14% of Slovakia’s GDP sold off.

 

By 2007 the privatisation of former Eastern European communist countries was nearing completion, according to the OECD report, but China and Russia were then emerging as new giants in the privatisation stakes.

 

A partially successful objective in the UK was to shrink the state. Lots of assets were sold off – billions but today that state, which does have a smaller balance sheet (less assets), is still the same size by revenue in the UK in 2018 as it was by share of national income which is at the average in Europe of 38%. And the capital sums were largely disbursed as current spending which is simply bad economics.

 

Another also partially successful target was to break up the power of the unions in public companies and the public sector. But this was helped by hyper globalisation; laws against unions; “business friendly” polices which went much too far; and technological change where capital has reaped nearly all of the rewards.

Vast Sums but Many Failures in these Changes of Ownership

States made huge sum of of money in the process of privatisation, but did not always use it wisely and mostly, and privatisation did not deliver what was promised. It did work in some cases, but not in others. It was too often a costly change in ownership and in others simply more costly.

 

Privatisation is a giant asset-stripping process. It is a very efficient way of taking money out of taxpayers' pockets" so said the late Gwyneth Dunwoody the Labour MP in 1995 during the debate on rail privatisations. In fact it turned out worse. It was to cost the taxpayer much more in subsidies to the private operators, safety was an issue (fixed since), and fares rose faster than inflation to become the highest in Europe. There was also little information and coordination of timetables. Finally, the subsidies today are five times those during public ownership.

 

On efficiency privatisation did have had a few successes in the UK but mostly on low bases.

 

The UK National Audit Office (NAO) found that schools built under the PFI cost 40% more and hospitals were 60% more expensive than the public sector alternative. NAO also found that the cost of capital was much more expensive – twice as much as interest on 20 year government gilts. 716 schools hospitals and military establishments have been built under PFIs, now rebranded as PF2 in the UK because of the toxicity of the name. All cost more than direct public funding.

 

The Railways privatisations were a costly mistake. A key objective, (like Irish government’s housing policy today), was to ensure that private finance got a slice of the action. This was done by having them own the rolling stock which they leased to 25 operators. Then there is the track operator too. It was a mess with competing companies, distrustful of each other, which do not coordinate unless forced by a new bureaucracy. The shareholder democracy was not created in Britain.

 

Pendulum Swings Back

The pendulum has finally swung back. While some privatisation is continuing there is substantial renationalisation and in-sourcing of outsourced functions by various companies, public and private. Privatisation has been a major costly political action driven by the Right.

 

However, we can’t tell yet if the pendulum will continue to swing back against privatisation, but it has clearly changed direction. This is especially true when it is the Tories who are undoing it.

 

The Irony – Johnny Foreigner Takes Over

Many privatised firms in the UK are owned by European state-owned firms. The Tories privatised the railways, but ironically much of it - a whopping great 75% - is owned by foreign state companies, for example Germany’s Deutche Bahn and NS of Netherlands. Ireland’s state company ESB has several plants in the UK where there once was a British state monopoly CEGB, along with other foreigners. This demonstrates that public firms are efficient too, as are most of Irish state companies (with exception of HSE, which does not even have a board). Many of the 9 water UK firms are in foreign hands. So the pendulum began to swing back in one way a while back.

 

Recently USA and Europe are blocking certain (Chinese) foreign ownership of strategic firms which may indicate that state ownership of such strategic firms may come back into fashion even with conservatives to block unwanted foreigners.

 

The reversal of privatisation trend took much longer than I had expected. It was not just because of its failure to meet its promises but also because any analysis of its under-performance showed its reversal was needed. The main reason for the slow revision on the idea of privatisation was not the high immediate cost of reversal but because the Right was in power in most states; and as I have argued in Social Europe recently, many European Social Democratic parties in government had bowed to the (seemingly) overwhelming power of global markets in its favour. They forgot that political power still resides in the state. Thus, many joined with the Right in privatising too.

 

The Future

While the Tories have been forced by failure to reverse UK privatisations, the UK Labour party intends to re-nationalise all utilities. This will be very popular. It will also be expensive. However, it can build up increased shares over time, indicating that it intends to take majority control. By waiting until the 20 rail franchises run out, they will get many assets back without cost. The same applies to the PFIs which run out too. 

 

In the next blog we will see that Ireland is bucking the international trend, privatising housing in a slightly demented fashion, but also buses, the new Maternity Hospital, most local authority delivery of services and more.

 

Paul Sweeney has been writing critically on privatisation since the 1980s when it began. His first book was “The Politics of Public Enterprise and Privatisation” back in 1990. He has written over ten pamphlets/reports and many articles on the subject including this one on the performance of Irish Public Enterprises in the 1980s.  Another book “Selling Out? Privatisation in Ireland” was published in 2004 by TASC/New Island, Dublin.

 

Posted in: Corporate governance

Tagged with: privatefinanceprivatisation

Paul Sweeney     @paulsweeneyman

paul-sweeney

Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions.  He is a member of the Economic Committee of the ETUC and chair of TASC’s Economists’ Network. He was a President of the Statistical and Social Enquiry Society of Ireland, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.


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