Why privatisation always trumps nationalisation

In a recent poll, there was strong support for the renationalisation of both the railways and the energy industry. In both cases, renationalisation would be a strange step back into the dark ages of state controlled industrial strategy. As it happens, ownership of the railway infrastructure is already nationalised although the trains are operated privately. It is the problems caused by the nationalised part of the industry about which the most complaints are made.

When we are sitting on a train complaining about delays, that delay is normally caused by the nationalised infrastructure company and not by the private company operating the trains. When we complain about the costs of the railways and the level of government subsidies, the nationalised network is responsible for those high costs to a much greater extent than the private operating companies. Nationalisation cannot be the solution to the problems evident within a nationalised industry.

Indeed, the private part of the train network – the operating companies – are doing spectacularly well by all measures whether it is passenger traffic, investment in rolling stock or the marketing of special cheap rail deals attractive to different types of customers. There is a good news story here. Passenger traffic is back at levels not seen since the 1920s, having increased by 88 per cent since privatisation.

Any students wishing to travel home to Manchester for Christmas can book a lunchtime train from London with Virgin for just £30 in mid-December. This would be a first class ticket with free meals, drinks and Wi-Fi; something I could have only dreamed about as a student. So, let us not go back to the dark days of nationalisation. Indeed, it would be much better to allow the industry to merge the track with the trains under private ownership to avoid the unnecessary costs imposed by the artificial split.

The situation in the energy market is similar. Privatisation was an unalloyed success with prices falling by over 30 per cent in the following decade or so. What has happened since is a form of corporatist state control of private businesses as regulations and costs have been loaded onto the energy companies – and investment plans dictated by the state. The government has locked in a nuclear power deal that involves guaranteeing twice the current market price for electricity. The state also requires companies to source energy from renewables costing up to three-and-a-half times the cost of producing electricity through the cheapest method.

It is true that, today, after a decade or more of increasing state control, we have an energy industry that serves vested interests rather than the consumer interest once again. Electricity prices before taxes are now 15 per cent higher than the average of major developed nations. Electricity could be around 50 per cent cheaper without the government’s interventions. We must liberalise that industry and not return to the state control that is the source of most of the industry’s problems.

We should, perhaps, remember one fact from the era of nationalisation. In the post-war period, government planning dictated the development of a nuclear programme using expensive technologies promoted by the government of the day. This led to the most expensive government project disaster in British history, costing well over £30bn.

Perhaps the nationalised High Speed 2 rail service will beat that record. We may have grumbles from day-to-day but it is far better to have private businesses that are responsible to consumers and shareholders rather than nationalised industries that answer to bureaucrats and vested interests. The record demonstrates that. If anything, the experience in both the rail and energy industries suggests that the government needs to intervene less and not more.

This article was originally published by Policy Review.

Philip - I have many times pointed out to people who complain about the privatised rail industry that in fact the network was long since re-nationalised, that the subsidy goes overwhelmingly to the network operator and that this only increased (hugely, by the way) after re-nationalisation. The other thing that isn't pointed out to those supporting re-nationalisation is that it would require them to pay higher taxes to buy back the industries concerned... Coincidentally, I was just online a few minutes ago looking to book my daughter's rail tickets back from Glasgow University for Christmas. £91 return (not first class!) via London. Not too bad (albeit coach services are half the price although slower).
Philip, You say that electricity prices fell dramatically following privatisation but are now 15% above developed-country average before tax. Is there a possibility that what has happened in electricity echoes what has happened in water, where private equity has loaded debt onto the companies so as to pay super-normal dividends, and been allowed by the regulator to pass the costs of that debt on in higher charges. http://www.centreforum.org/index.php/mainpublications/505-money-down-the... Regarding the £30 bn cost for the first (two?) wave(s) of nuclear, is that in 2013 pounds?
thanks, HJ, good points. Tom - I doubt it, there are certainly different types of ownership and business models in energy whereas we all face monopolies in water. However, the regluator should (I don't know whether they do) take into account only the cost of risk capital in the business when regulating water charges and not the cost of the particular financial structure that happens to have been adopted. Also, consumer prices in energy are surely not regulated.
Thanks Philip. I think the distinction between water and electricity regulation is that the electricity regulator focuses primarily on competition, whereas the water regulator regulates prices. That may make the practice I described impossible in electricity. As for water, I think it depends how the regulator does their job, and I suspect that while Sir Ian Byatt did the job well, the same cannot be said for others. The new head of Ofwat may be more in Sir Ian's camp, however. We can only hope!
agree, Tom

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