Does Privatisation Work?

Being more left than right, I am a little cynical when the idea of privatisation is raised. Something about the idea of “selling” off £billions of key public infrastructure sits uncomfortably with me. Many of our utilities are now owned by anonymous shareholders who have little accountability and reside in a range of other countries. One reason that this worries me is because remotely positioned shareholders have no interest in local concerns such as the environment, unemployment or the needs of local users, but only in the profits that their holdings are able to generate. With the issue of privatisation looming ever larger for Health and Education I have decided to try and take a deeper look into whether or not it really does deliver on its promises of greater efficiency and so better outcomes for all of us.

The current picture does not sell privatisation well, in 2010 water bills increased by 5.5% which fuelled an increase of 18% in profits while 13million people were subject to water restrictions because the company was losing 3.5 billion litres per day due to leaking pipes according to the BBC.  The Telegraph asserts that in the energy sector, electricity and gas companies are estimated to make £105 profit for every customer they serve, a jump of 40% over the past 4 months due in large part to their pre-winter price increases. Similarly, in 2010 Rail company profits including stagecoach (up by 38%) and National Express (up by 43%) went up largely due to significant and on-going price increases. Perhaps however this is due to a recent loosening of regulation in privatised industries which has unquestionably occurred, therefore let’s look at the immediate post privatisation figures when the governing laws were at their tightest.

The UK’s water industry was privatised in 1989, in the first 9 years water prices increased by up to 50% over inflation. When challenged the water companies explained that this was due to chronic under-funding while the interests were public and so the price increases were necessary. In the water industry operating costs did fall slightly and capital investment did increase slightly, but the entirety of the price increases between 1991 and 1998 were accounted for by increases in profit which grew by 147% (yes you read that right) . Surely this can be accounted for because this was an early experiment in privatisation and perhaps the regulation wasn’t quite right? No. The regulatory framework surrounding the privatisation of the water industry expressly stated that privatised water companies should be able to make a “reasonable return on their investment”, consumer protection was actually a secondary duty within the framework. What about other stakeholders you ask? Well employees have been hardest hit with 21.5% having been made redundant by 2003, but the implications for the environment have also been severe. In a list published by the Environment Agency in 1998, one in five incidents of pollution were caused by water companies. All of this took place in a background where executive pay increased by up to 200% - well, I guess the profits went up!

Water is hardly a glowing advert for privatisation then, what about the other experiments?  In the electricity industry the cost of supplying each unit rose by 12% in the first two years after the 1990 privatisation. Although this was later corrected with costs falling by 20% in 1994/5, these savings did not appear to make it to the consumer with revenues increasing by upwards of 20% and profits rising rapidly. Fundamentally, once again the same trend is evident, privatisation has been a vehicle for increasing profits and dividends without any accompanying benefit for consumers. Indeed, the ‘convenient’ timing of regular increases (and occasionally decreases) in prices have led many – including the Guardian - to call for an investigation into to lack of competition in the industry since the companies have seemed to increase prices together immediately prior to busy winter periods - in the second half of 2011 electricity prices increased by as much as 25% in two rounds - before dropping them, again in symphony toward the end of winter in early 2012. Furthermore, many electricity suppliers now supply both gas and electricity meaning that they can promote them together and bill them together making huge savings which as has been shown are not making it to the customer. In addition, you will not be surprised to hear that since privatisation in 1994, Rail fares have also increased on average by over 100%. This, in an industry that is still subject to government subsidies of £5.2b per year. This means the government sold these companies ostensibly to improve efficiency and yet continue to give them tax payer’s money while they are allowed to charge double the prices that were being charged before and profits continue to rise.

It is difficult to get private investors to buy into these things initially as the potential profit was not always obvious during the 1970's and 1980's. In order to provide a profit incentive the government pre-privatisation re-structured the organisations and in some cases cancelled debts while providing ‘golden hellos’ to the companies taking them over. For example over £5b of debts were cancelled in the water industry and £1.6b was handed over to get the private companies started. This hardly suggests to those companies that they have objectives beyond making a profit.  Some commentators argue that the reasons for the privatisation had nothing to do with efficiency but were a means to shrink the size of government and avoid costly headline making public spending commitments. In short, it is argued that these decisions were made for political reasons. The government of the day had planned to privatise the water industry in 1984 until it met fierce public criticism which could have affected the outcome of the 1987 election. They shelved the idea then but continued to work on it quietly pushing it through quickly after the 1987 election. Public sector organisations were set up to ensure that we are all able to access the basics of life at a reasonable price. By turning them over to the private sector the goal becomes to provide them as profitably as possible, remember that executive boards have a legal obligation to maximise value to shareholders, not the public at large.

I could go on but it’s going to start looking a little vindictive. The question that this post asked is whether or not privatisation really does deliver on its promises of greater efficiency and so better outcomes for all of us? From what I can see the answer is a fairly resounding: No. What is clear is that in every privatised industry both prices and profits have increased. Whilst there are some small pieces of evidence that efficiency savings can be made, there is nothing to suggest that the benefits from these ever make it to the consumer. Where privatisations have occurred there is solid evidence that they have not delivered benefits to consumers and profits have been prioritised in all cases, indeed very often privatisation comes with high prices for other stakeholders as well.

There is an argument beyond the figures though, a much more emotional and individually persuasive one. If you needed an operation, would you be comfortable with an executive or a shareholder in another country making decisions about the level of care you will receive? About the painkillers you are allowed to have? About how many operations your surgeon has to perform in a day? These are ethical questions that require consideration of the value of life and quality of life, not just a multi-national’s balance sheet. I am not comfortable with my life, my education or my family playing second fiddle to a share price. For me the goal of organisations such as the NHS are to provide benefits to society and its individuals beyond profit increases and efficiency savings. They exist to deal with larger issues that the private sector historically will not approach precisely because there is no short-term profit in dealing with them.

Hate the Player or the Game?

In the words of the esteemed Henry Ford (yes the car maker guy) "If people understood the banking system they would revolt!" Our entire financial and political system is corrupt. For example in the U.S recently it was proven that large banks had been paying property valuers to over value homes. Although this doesn't seem so contraversial at first, it means the customer then pays a higher price and so has to borrow more money and consequently pays more in interest on their loan to the bank. In any other industry this would be considered a scandal, racqueteering perpetrated by thugs and miscreants, however because this crime has been comitted by men in sharp suits with psuedo-legitimate job titles the affair has been virtually ignored. Sadly this is only the thin end of the wedge, the more we peer through the murky waters of our financial and economic system the more prescient Ford's words seem to be.

The over-inflated house prices signal to greedy banks that there is money to be made, despite the fact that the smoke comes from a fire of their own ignition. In their greed the banks then lend too much money to people that can't pay it back, safe in the knowledge that they will sell on the risk anyway. Despite the fact that the banks know that the debt is toxic, they can do this legitimately on the financial markets because the debts are insured by companies that also rate the loans as secure meaning they are more likely to be bought for a higher price and in another curious little kick-back the insurance service is bought again and again. Everybody wins...

Unfortunately and innevitably, sooner or later the people who borrowed too much can't repay their loans. The insurance companies are asked to step in but quickley exhaust their reserves and fold. This sets off a chain reaction of people losing money, from the institutions that bought the debt, through the businesses that invested in the institutions, down to the employees and beyond, out into the economy at large. Among other things, this means less deposits in the banks which can't cover their depositor obligations due to the consequent lack of liquidity. Fortunately up pops the Public Sector (us tax payers) who save the banks and everyone's deposits. The down side is that the money has to come from somewhere (or so we're told - why it couldn't be leveraged against the banks' assetts is beyond me) and so public sector employees lose their jobs / pensions / salaries setting off another chain where there's less spending in the economy and so the private sector too has to cut costs and lay off employees. This means even less spending, less tax receipts and so less support services for those that need as a result of the now innevitable NHS cuts etc... which also mean less job opportunities. Still with me? So far we have covered basic economic effects of a faulty or misused system, but here's where it really starts to get dirty.

The men and the companies that caused the crisis are fine because the companies that they own have limited liability meaning they can only lose what's in the business and not the personal possessions of owners to meet any debts. The board members are fine since they were making ridiculous wages in the first place, and anyway, they sold their shares long before anyone else knew that trouble was brewing. They went on to invest that money in commodities such as gold which are cheap since everyone outside the loop is buying shares in their businesses instead as, thanks to the insurance companies on their payroll and accountants like Enron's, these look on paper as though they are [still?] making a profit.

When the trouble finally hits the front pages, money haemorrages out of the stock market and into commodities meaning that the value of their holdings sky-rockets overnight, all thanks to the mess they made in their own industry. The value of stock market linked pensions disintegrates however, since they were invested in the "sure thing" investment opportunities that never really existed and have just rolled over and taken their last breath. Meanwhile all the people that didn't cause this are told we have to bite the bullett and pay our share for the Public Sector rescue, while those that did continue to take bonuses beyond the dreams of most of us and anyway dodge their tax because their money is sat in untraceable offshore accounts.

Wealth generates more wealth precisely because of the way that our system is set up, but it also encourages the people that benefit to protect that system. The scary part is that this does not just mean the Bankers themselves, newspapers, T.V., film companies and all large business are owned by this small group of super-rich individuals that stand to gain. Even worse, the only defences that we are our democracy and our judiciary, have you ever seen a poor barrister or a starving politician???

We shouldn't blame people for accepting gigantic rewards because the system is set up to deliver these and natural selection dictates that we are all looking for an advantage (would you turn down a £3m bonus?). The problem is not the people, its the structure and those in charge of regulating it. And anyway, until we start to demonstrate some power to bend this sytem to our will, we don't have a hope in hell of controlling those within it!

Which Way Now?

Economic development throughout the 20th century was pre-empted by a labour movement that ensured democratic benefits such as safe working conditions and free health care and forced some 'trickle-down' to the majority of the populace. At the beginning of the 20th century the very existence of the capitalist model was in doubt as workers protested en-masse about lack of rights, poor working conditions and unfair remuneration, often these protests used violent means suggesting the breakdown of society in general. Fast forward to the 1960's - 80's beyond the creation and expansion of the welfare state. It seemed the battle had been won, conditions were improving, there was a solid and thriving middle class, social mobility was at its highest ever level - everyone had rights. However, in a seemingly directionless fashion the labour movement continued to push for reform and as they did many suspected an undercurrent that favoured the Soviet Communist model.

Many believed that the industrial actions of Trade Unions threatened the long term prosperity of the UK economy and thus something had to change. Maggie Thatcher and the Tories at the end of this era defeated this movement by defeating the idea of collectivism, she offered individuals more acting alone than they could hope to achieve working in concert. As is the nature of survival of the fittest, those who were able to accpet did so - rightly or wrongly. Unintentionally perhaps? Divide and conquer became an option for the owners of capital and has since spilled into the public sector as well - the traditional bastion of collective bargaining.Many will say that Thatcher and her colleagues saved this country. If you agree that the only model of communism is a totalitarian one then they are correct to say that this danger was averted. However, in all of the back slapping and continued stretching for greater economic efficientcy we have seen, something has been missed. We have forgotten what it is that our economy is designed to do in the first place.

In those early days of the 1900's the majority in the country took back the political and economic agenda and attempted to make it serve the needs of the average person rather than their typically politically dominant priveledged contemporaries. Over the last 30 years we have seen the opposite happen, greater wealth concentrated in the hands of the few, the same few in whose control lie the machinary of political, social and legislative change. Is it then a surprise that we stand to lose the services that our forefathers fought to guarantee us? NHS, care for all, basic living standards and free education? One by one these things are being turned over (public assets sold below market value) to the private sector in the name of greater economic efficiency. It seems we have all been so desperate to have more that we have forgotten why.

In Britain we work the longest hours in Europe, we also have the highest number of people on long-term medication for depression in Europe. Last year CEO's recieved an average pay increase of 49% - during a period of negative growth where profits were universally down - their employees recieved an average wage increase of 2.2% while their public sector counter-parts were subject to pay-freezes. In good times pay increases are capped with inflation but it seems we are not guaranteed this when times are harder.We are told that the country is in recession and sacrifices have to be made and in the hilarious parlance of the dominat coalition partner "we're in this together".

Unemployment is at its highest level since the early 1990's, inflation is rising rendering even private sector pay increases irrelevant for most and economic growth has ground to a stand-still, and yet we continue to reward our already rich captains of industry to an outrageous and improving level - CEO's of the largest banks which lit the blue touch paper for this crisis recieve as much as £25m per year in complex packages that even the shareholders do not seem to understand. Why? What exactly is it that they are doing to merit such reward? As a society, we can see growing evidence that all is not well. Breakdown in social cohesion, rise in multi-generational long-term unemployment, riots and the occupy movements to name but a few. These things force us to cast our minds back to the 1970's and perhaps given the economic context even to those early days of the 20th century.

Having moved once toward greater collectivism in the name of greater social justice, and once toward greater individualism in the name of greater economic efficiency. Regardless of your personal political allegiances it seems clear that the economy is not working for most people and in our fluid capitalist system change will certainly come, so the question is which way will we go now?