Privatisation: an idea whose time should never have come

A strong vogue for the privatisation of publicly owned enterprises and assets has been a prominent feature of the “neo-liberal” economic ideology prevalent from the 1980s. The justification for it – to the extent this was ever really considered necessary – may be said to have lain in the perception that, as part of the “mixed economy” model widely adopted in the West after World War II, public ownership was readily viewed as a failure. It was also suggested, based on little hard evidence, that private-sector ownership acted in principle as a spur to greater efficiency, with potential benefits to consumers as well as the public purse.

Such simplistic beliefs could in fact be shown to be no more than a manifestation of the narrowest ideological bigotry. Any examination of capitalist economic history – before or since the Industrial Revolution – shows it to be full of examples of state enterprises, of which arguably the most notable was the East India Company (incorporated by royal charter in 1600), in key positions, usually acting as vehicles for subsidising private enterprises. Hence it is necessary to ask what was the real motivation for the large-scale privatisations beginning in the 1980s.

In fact the answer to this question seems quite obvious in the context of the latter-day evolution / dynamics of the global market (capitalist) economy – if only with the benefit of hindsight. For a cursory study of developments in this area indicates a chronic and intensifying shortage of new outlets for profitable productive investment (as opposed to speculation) – a shortage that would ultimately threaten the stability or even survival of the capitalist system. Abundant state-owned assets could obviously provide a significant contribution to filling this gap, even though it was clearly not politically expedient to give this as the reason for privatising them.

Instead it was felt necessary to claim that private-sector ownership would tend to induce greater efficiency in their operations, theoretically (it may be supposed) great enough to offset the cost of distributing extra value added to private shareholders. This despite the fact that in Britain, where the Thatcher government eagerly assumed the role of global pioneer of privatisation in the 1980s, many of the soon to be privatised public utilities had actually been established – often by Conservative governments and as long ago as the 19th century – for what had been perceived to be very practical reasons. Chief among these was that most such utilities were effectively natural monopolies whose private-sector customers did not wish to find themselves at the mercy of monopolistic private-sector suppliers – a realisation reflected in the creation of regulators for each sector (such as Ofwat, Ofgem etc) following privatisation. It is in fact a little remarked truth that the cost of creating and operating such regulators has added an extra layer of cost to the entire business (borne by the taxpayer) , so that a full reckoning of the costs and benefits of privatisation in Britain would almost certainly show a negative result – even if it could be shown that the regulators were effective in protecting consumers. On top of this the privatised companies have been allowed to load their balance sheets with substantial

amounts of debt, the sole purpose of which has often been to finance higher dividends, although naturally the costs of servicing this debt are ultimately borne by consumers.

The failure of this ideologically driven theory to deliver in practice the benefits promised by its advocates can be illustrated from the record of three sectors that have been subject to privatisation in Britain.

  1. Energy (electricity and gas) supply.

This has been largely in the hands of six large companies since privatisation in 1990. Each has been set up as a de facto regional monopoly, even though in theory the process was supposed to stimulate competition. Investment in infrastructure, which is supposed to be monitored by the regulator, Ofgem, is meant to maintain cost-effective distribution to consumers. In fact because some infrastructure, such as cabling and pylons, is common to more than one regional monopoly there has been significant neglect of maintenance due to divided responsibility and inadequate intervention by the regulator. Hence an Ofgem report into Storm Arwen, which left a trail of destruction in parts of Scotland and northern England in November 2021, found that local electricity network providers had failed to carry out routine maintenance such as cutting trees, and that between 50 and 75 per cent of poles damaged in the storm were more than 40 years old, suggesting a lack of investment had contributed to the blackouts. At the same time much of the sector’s cabling has not been renewed for several decades, so that it has become old and inefficient, leading to leakage of power on a scale analogous to that in the water industry (see below).

Another adverse effect of privatisation in the sector has stemmed from the attempt to encourage competition from new entrants to the market. In fact, since the beginning of 2021, 31 energy companies have gone bust due to soaring wholesale gas prices, leaving over two million customers dependent on the safety net provided by the market regulator, Ofgem, to maintain their supplies and protect their credit balances while it moves them to a new supplier. The costs of this process will ultimately have to be met by the rest of the industry and their customers.

  1. Water.

The pattern of privatisation has been quite similar to that of the power industry, having occurred about the same time in 1990, except that there has never been any pretence that competition in the sector is possible. For that reason it might perhaps have been expected that the regulator (Ofwat) would be more diligent in holding the privatised water companies to account for maintaining adequate levels of investment and quality control.

In fact the companies have been permitted to extract £72 billion in dividends in the 30 years since they were privatised while at the same time investment has fallen by 15 per cent since the 1990s to £4.8 billion a year. The consequence may be seen in repeated discharges of raw sewage and storm water

into domestic water systems, rivers and the sea – to the detriment of public sanitation and health, not to mention the tourism industry. Yet to date the only penalty to have been imposed on the industry by Ofwat is a £90 million fine of Southern Water for raw sewage discharges, a trivial amount relative to the company’s operating profit of £212.3 mn in 2020 alone. The situation is such that there are increasing public protests and calls for renationalisation.

  1. Public Housing.

At the time it was initiated in the early 1980s there is no doubt the Thatcher government’s Right to Buy scheme – enabling council tenants to purchase their council houses at market prices (heavily discounted) – was politically very successful. Taken together with the privatisation of public utilities that was initiated about the same time – in which millions of consumers were offered free shares to encourage them to participate – it no doubt served to persuade many voters to buy into the Conservative vision of a “property-owning democracy”.

What was scarcely apparent at the time was that the real purpose of the exercise was progressively to marginalise public sector (municipal) housing to the point where private developers and landlords were totally dominant. This should have been clear from the fact that the terms of the scheme forbade councils to recycle the sale proceeds into new council house construction. This meant that the policy had the effect of progressively reducing the stock of social housing in England and Wales, so that it fell from nearly 6.5 million units in 1979 to approximately a mere 2 million units in 2017. At the same time private landlords were encouraged by strengthening their rights relative to tenants through the Housing Act of 1988. The trend in favour of the private rented sector was further bolstered by the expansion of Housing Benefit, designed to subsidise rents for those on low incomes. The amount spent on this rose from less than £2 billion in 1978 to over £24 billion in 2015-6, since when it has gradually declined by around 25 per cent. Meanwhile, however, house ownership has been further incentivised since 2013 via the government’s “Help to Buy” scheme subsidising borrowers’ deposits, which has also given an extra boost to already inflated house prices. At the same time little has been done to alleviate the widespread problems of homelessness and sub-standard housing, on which statistics are unreliable.

Taken together, the policies of Conservative governments in these three sectors since the 1980s – which were in no way modified by the relatively brief period of Labour government (1997-2010) – display a determined effort to favour the interests of organised capital – by artificially promoting private-sector investment opportunities – at the expense of wider society based on, at best, a spurious rationale. In the process they led the British and much of the world economy down a ruinous blind alley from which it can now only escape at considerable cost to society as a whole.

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