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Sunday, 19 February 2012

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.

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