IEA Economists Say Privatisation is Not Enough

IEA economists are often credited with initiating the process of privatisation in the 1980s.

However, in a major review of privatisation edited by David Parker, Professor of Business Economics and Strategy at Cranfield Business School and recently appointed by Tony Blair to write the official history of privatisation, a group of IEA economists argue that privatisation alone is not enough to ensure economic growth. The authors argue that:

· While privatisation is undoubtedly a good thing for the economy, privatisation alone is not a panacea for economic ills.
· Privatisation has been most effective when combined with deregulation and policies to promote competition.
· There have often been mixed motives for privatisation and this has undermined the achievement of economic objectives.

The relative performance of different privatised industries is consistent with the analysis. The performance of the water industry is well short of that of the electricity and gas industries. In the water industry the regulatory authorities control what should be commercial decisions and have done little to introduce the kind of competition that has been so beneficial in the energy markets. Much could be done to improve the performance of the water industry if the regulator used its power to promote competition in consumer supply and storage.

In railways, there has been a 40% increase in passenger volumes since privatisation with no evidence of a deterioration in safety, contrary to popular belief. However, whereas privatisation led to dramatically reduced costs in many industries, it coincided with a 300% increase in total operational costs in seven years on the railways. This cost increase is attributable not to privatisation itself but to an inappropriate structure being forced upon the railways by the government. No private railway had ever separated the operation of the track from the trains in the way that the government forced the train companies to in the railway privatisation.

The study concludes:

· The benefits of privatisation are reduced when not combined with deregulation and the promotion of competition.
· There is scope to significantly increase the degree of competition, and therefore the benefits from privatisation, in the water industry.
· Whilst there have been some benefits from rail privatisation the approach adopted by the government contained serious weaknesses that have bedevilled the railways.

Ends

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