Nationalisation returns to centre of political debate


Labour and the Conservatives stepped up the rhetoric over nationalisation this week, turning the question of who should own Britain’s utilities into an election issue for the first time in a generation.

Taking back the water and energy sectors into public control would cut average household bills by £220 a year, Labour claimed. The Tories countered that doing so would add £14bn to the national debt in a year.

But beyond the financial claim and counter-claim, the row signifies a widening of the political divide after years of convergence. By the mid-1990s, Labour had largely reconciled itself to the concept of private ownership after Britain became a world leader in the privatisation of services ranging from telecoms, gas, rail, water, airports and electricity companies in the 1980s.

Britain’s model has been copied extensively worldwide, although few countries have so wholeheartedly embraced private sector involvement — and in many cases, countries have subsequently reversed course. New Zealand, for example, sold its rail business to private owners in 1993 only to take it back into state hands in 2008 after a dispute over an upgrade of the network.

The question of renationalisation, should Labour under Jeremy Corbyn get its way, raises many important issues.

Costs

To nationalise an industry, government needs to borrow money to acquire the company. The Conservatives describe this as a huge cost, increasing government debt, but economists say that if nothing else changes, the public sector will have balanced the debt increase by acquiring an asset of equivalent value.

Tony Yates, a professor at Birmingham University, says: “In principle the company could be sold again at some point in the future, leaving public finances back to square one”. For economists, therefore, the acquisition costs of nationalisation are not an interesting issue when governments are able to borrow freely.

Efficiency

A much bigger question is whether ownership affects the efficient operations of a company. If the structure of the industry stays the same, economists often find little efficiency gains from privatisation alone.

Sir John Vickers, warden of All Souls College, Oxford university, who wrote seminal books on privatisation in the 1980s, agrees that ownership alone is unlikely to be massively important for efficiency. “Changing monopoly ownership, in either direction, does not by itself produce magical economic effects,” he says.

David Hall, a professor at Greenwich University who has been studying privatisations for the past 30 years, says there is no evidence that either the private or public sector is more efficient at running public services. With financing costs generally higher, “unless the private sector can deliver real substantial savings from efficiency, then it is invariably worse value”, he says.

Market structure

Instead of looking at ownership alone, economists tend to focus on establishing a market structure that promotes efficiency, where the most important criteria are competition and regulation to minimise prices and improve customer service.

“In industries where competition works, the economic efficiency arguments clearly favour private ownership. In hardcore monopolies the question is how regulation of private firms compares with state ownership,” Sir John says. “Neither is at all perfect, but the history of nationalised industries — with inefficiency, cross-subsidy and politicisation — should not be forgotten.”

In some industries, such as water, there is no possibility of changing the market structure to enable effective competition, so the case for private ownership is much weaker.

With these ideas in mind, for example, multiple mobile phone companies have been given the right to provide mobile telephony in most countries and told to compete, when the industry could be seen as a natural monopoly. Short-term efficiency losses from duplicated infrastructure have been shown to be outweighed by longer-term benefits from competition, which has increased innovation of services and lowered prices.

State interference

A principal concern about nationalised industries is that they will not be run on commercial terms but be subject to the whims of ministers, who can have powers ranging from pricing to wages.

Once they depart from commercial operation, one of the most damaging aspects of nationalisation can be that investment is not set according to the needs of customers and the industry, but instead starved when government finances are weak and raised in times of national plenty.

Prof Yates says: “There will be political pressure on government owners not to manage the assets in a commercial way and to use it as a means of redistribution.”

Culture

One of the most difficult aspects to evaluate is the extent to which the culture of companies depends on their ownership structures. There are important questions that trouble both main political parties — for instance, how to curb the tendency of private energy companies to exploit the reluctance of customers to switch providers and make excessive profits.

To address this, the regulator has suggested making switching easier to preserve competition, while the Conservatives want to cap bills and Labour wants to nationalise the companies and thus change their culture.

Risk

One of the reasons public ownership can appear cheaper stems from the lower financing costs of government. This underpins Labour’s annual savings calculations. But lower financing costs have to be balanced against the risk of losses if the service becomes less efficient or goes bankrupt, potentially putting the taxpayer on the hook.

Even in private monopolies such as water companies, shareholders would bear the burden first if the company made large-scale losses.

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