What we Lose when we Privatise

David Cameron has recently called for “more fair” energy tariffs from privatised energy companies, promising an end to their “tricks” and “loopholes”. Mr Cameron also apparently holds that SW Water rates have been unfair. Such concerns are not limited to SW water. According to the Jonson Cox, the chairman of industry regulator Ofwat, many other water companies pursue profit and taxation strategies which might be regarded as being “morally questionable … in a public service”. Similarly, an in-depth report by the Centre for Research on Socio Cultural Change at the University of Manchester has argued rail privatisation has been a “serial shambles creating artificial profits for the franchise holders and hidden costs for the public”. If the government doesn’t like the way privatised services operate, it seems reasonable to ask why they are so keen on privatising yet more public services.

The purpose of privatisation is often said to be to improve efficiency – although how this is to be defined is open to debate. State owned Scottish Water appears capable of providing less expensive water services than its privatised equivalents south of the border. Also, several of the UK’s supposedly private sector railways are actually owned or part owned by other national governments; for example, Arriva and Northern. The one British rail franchise which remains in UK public hands, the East Coast mainline, received (2011/12) the second to lowest subsidy from the taxpayer, only 0·5p per passenger mile, compared with an industry average of 7·5p. The people of Britain, at any rate, seem to prefer the service to remain in public hands for the moment.

In a recent discussion on the re-privatisation of the East Coast mainline, Graham Morris (MP for York Central) pointed out “By the end of this financial year, East Coast will have run the service for four years, returned about £800 million to the Treasury and provided an improved service.” This brings us to our second point; at a time of trying to reduce the budget deficit, can the government really afford to lose the profits which well run public services bring? Generally, before privatisation, publically owned industries make money for the government and hence for the taxpayer (Dewenter and Malatesta1): Afterwards, of course, they make money for the private sector.

Further, there are hidden social costs of privatisation, for example the reduction in the workforce which generally follows the adoption of narrow market-based objectives. As Haskel and Szymanski2 and Dewenter and Malatesta1 show, companies’ work-force sizes reduce after privatisation. At a time of historically high unemployment in the UK, we can ill afford to adopt employment reducing economic policy, however much private profit will result.

Despite all this, plans are being drawn up for further privatisation in the UK. Amongst the companies to “go under the hammer” is the Royal Mail. If past experience is anything to go by, we might expect:

  1. A reduction in profits to the government – Royal Mail Group made a profit of £440 million in the 53 week year ended 31 March 2013.
  2. A reduction in government tax receipts – as noted above, private sector companies have been known to engage in tax avoidance.
  3. A reduction in employment – effectively turning a proportion of the workforce from taxpaying employees to welfare beneficiaries.
  4. A deterioration in service – arising from there being fewer staff.
  5. An increase in charges to the service user – followed shortly thereafter by government ministers’ complaints of “tricks” and “loopholes”.

Ultimately, debates about efficiency ignore a distinction between private and public companies: Private sector companies are ideally run solely to maximise profits while a public sector company might be run so as to maximise return to society3. The best return for shareholders is by no means guaranteed to be the best return for the nation.

Kevin Albertson

1 Dewenter, K.L., and Malatesta, P.H. (2001) State-owned and privately owned firms: An empirical analysis of profitability, leverage, and labor intensity, The American Economic Review, 91(1), 320-334.

2 Haskel, J., and Szymanski, S. (1993) Privatization, liberalization, wages and employment: theory and evidence for the UK, Economica, 161-181.

3 It is sometimes argued that principal/agent theory implies civil servants might not always do what is in the interests of society, but it can equally well be argued CEO’s might not run a business in the best interests of shareholders.

This entry was posted in Uncategorized. Bookmark the permalink.