Privatisation

Since Margaret Thatcher in the 1980’s successive governments have followed a policy of selling-off state-owned assets and industry in a process of Privatisation. The theory behind this is that state-run industries are inherently inefficient and therefore costly to the taxpayer. Selling them off delivers them into the hands of private industry, which will be able to run them more efficiently and thus more cheaply, making profits for them and lowering prices for the consumer. An added bonus is the windfall to the government of the proceeds of the sale – thus everyone is a winner. Except we are now starting to see that they are not.

This is complex, every privatisation is a different case, and undoubtedly some of them have worked. However in general the theory is flawed and this is why:

1. In the early stages of a privatisation there are usually lots of inefficiencies in the organisation, and it is quite often the case that as these inefficiencies are ironed out the standards of service improve, and costs to the consumer either decrease or stay static, so things seem good.

2. As time goes by the owners of the organisation seek to increase profits further, but when all the obvious cost-cutting measures have gone, it is now that things get messy. Driven by profit, and with no real interest in public service whatsoever, they cut costs by decreasing service as much as they can. So whereas a state-run organisation would have a culture of trying to provide the best public service possible, the private company will have a philosophy of providing the minimum level of public service they can get away with – a very different way of operating. In addition they will start trying to increase their prices as much as they can as well, frequently using all sorts of excuses such as ‘market rates’ etc.

Privatisation may have delivered improved services, but our railways are now the most expensive in Europe. Picture © Phil Scott

People who support privatisation will say that competition will force companies to keep standards of service high, and prices low, but the reality is that some privatisations aren’t open to competition anyway (eg the water companies, also the rail companies once they have got their franchises signed and in the bag), or where there is competition the companies often operate as a cartel (eg the energy companies) all providing pretty much the same (poor) service anyway, and similar pricing.

There are other problems associated with privatisation too. When a company is driven purely by profit they are likely to make commercial decisions which are not in the national interest. For example a state-run power company would do its utmost to avoid power cuts, as this would be terribly disruptive to the lives of ordinary people. A private company would make such a decision on purely commercial terms, and if power cuts weren’t too costly then so be it, and who cares if ordinary people suffer. In addition many of our public service companies are now in foreign ownership, which means a lot of them avoid tax by channelling their profits abroad using tax havens, something that could never happen with state-run companies. Also a state-run company could be expected to have some regard for the environment, not for example trashing forests and rivers in order to provide its services. A private company would have no such concerns as all that matters to them is the money.

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Rolls Royce – one of the more successful privatisations. Picture © David Monniaux

Now let’s be clear, some privatisations do work, and you won’t hear anyone complaining now about the privatisations of British Steel, Rolls Royce or BP. Some privatisations partly work – for example in some areas of the country the standard of rail service is now far in excess of what it was under British Rail (though a lot more expensive – recent research has indicated privatisation has cost the consumer an extra £50bn*). However a lot of privatisations are clearly a failure with increased prices and/or poorer service – some of the rail franchises for example, the energy companies, and also the water companies, where it has recently come to light that the regulator has ‘accidentally’ allowed them to overcharge the general public by more than £1.2 billion.*

The crucial thing to consider with privatisations is whether it’s a public service or an industrial. If it’s an industrial (eg Rolls Royce) then there’s no real reason for it to remain in public hands and selling it off is a viable option. But if it’s a public service (eg water, power, post office, etc) then selling it off to private industry can, in the long term, only lead to ever higher prices and ever lower standards of service for consumers.

* Water Company Overcharging:  http://www.independent.co.uk/news/uk/home-news/a6808386.html

* Railway Privatisation Costs: https://www.thetimes.co.uk/article/privatisation-put-50bn-on-cost-of-running-railway-study-claims-v7nvxkrgc

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3 thoughts on “Privatisation

  1. Privatisation with as little regulation as required mixed with public control over natural monopolies, eg, water, power, infrastructure is an essential part of a strong economy.

  2. Excellent read Peter! I particularly agree with and like your last paragraph. Consideration needs to be given as to whether the business is a natural monopoly or not. One other very important benefit of nationalisation, which is often missed is that Government owned business gives government a source of revenue other than taxation that can be exercised as appropriate (for example in times of recession when tax income is down).
    The key is that such public services need to be highly accountable and its staff motivated to provide good service at efficient cost, but there is no reason this can’t be done with good process. Far better chance of this happening with a monoply that is required to work in the interests of society, rather than one in the interests of private profit!

  3. I’ve been wanting to get my head around all this for ages and your articles explain things really clearly. I’ve not been convinced about austerity and from the information so far, austerity is used as an excuse for the corruption and greed that has got out of control, in other words it’s a huge fat lie! Thank you for caring about what’s really going on and educating the rest of us. Knowledge is power and recently I saw a great film called the modern slave, it just about said it all. Sadly money talks in this crazy society that doesn’t understand that peace, compassion and harmony with one another and the environment is the greatest wealth not bits of printed paper and material things that are distributed only to the wealth whilst the poor are queing up at foodbanks for tins of spam and living in ghettos.. We are destroying all forms of life in the name of free market capitalism and it’s shocking!

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