Privatisation failure – the micro analogue of fiscal surplus obsessions

Our business leaders are amusing themselves at the moment sailing large and expensive yachts in various summer regattas and races and lecturing us on how our democratic choices (to elect parliamentarians) is holding back the country – “ill-equipped for life after the mining boom” is the code words used (Source). Apparently, we should not elect parliamentarians that oppose their conservative agenda to transfer increasing volumes of real income to the top-end-of-town (that is, them). Their mantra never changes – its all about them not us. This article in the New York Times (September 26, 2014) – The Benefits of Economic Expansions Are Increasingly Going to the Richest Americans – not only promotes the excellent work of MMTer Pavlina Tcherneva but is apposite to the message of today’s blog. Which brings me to a recent decision by the UK government to allow rail fares to rise well in excess of the inflation rate and the growth in wages.

The UK Guardian article (January 2, 2015) – Fare rises show why British railways should be renationalised – was one of those recurring narratives that tell us about the on-going damage that the early stages of neo-liberalism wrought.

The article resonates strongly given the dreadful privatisation of public transport in some Australian states, which would be comical if not so serious.

Rail fares have risen again in the UK (ahead of the inflation rate and the growth in nominal or money wages) even though service reliability has continued to deteriorate across the network of private train and bus services.

When I was in Italy in November I caught trains between Rome and Milan and within Rome (the metro) and was surprised how well-priced the service was compared to similar services back in Australia. The fast trains (which we do not have) are excellent in Italy. The train services and the rail infrastructure I travelled on are publicly-owned.

It seems that the UK public transport user is not so lucky. The UK Guardian article (January 2, 2015) – British commuters ‘spend more on rail travel than other European workers’ – documents how “British commuters spend a bigger proportion of their wages on rail travel than workers elsewhere in Europe” and that “travel costs continue to outpace wage growth”.

Once Margaret Thatcher’s ideological zealots started hacking into the public ownership of the rail system things have deteriorated. The UK Guardian tells us that:

After two decades of privatisation the British people pay the highest fares in Europe to travel on clapped out, understaffed and overcrowded services while the private train companies are laughing all the way to the bank. Today’s fares jump just fuels that scandal.

We also learn that since May 2010, when the Conservative government took office:

… fares have increased by 27% … while UK workers have suffered six years of falling real wages as consumer inflation has persistently outpaced pay growth since 2008.

Not to mention the several years of recession and declining national income as a result of the poor response to the GFC.

A good source of analysis of the “cost of privatised living” is provided by the UK public services advocacy group – We own it – although the reality is that “we” used to own it.

Further research by the UK group – Corporate Watch – published last year – Energy, rail and water privatisation costs UK households £250 a year – found that:

– Households across the UK could save £250 each on their electricity, gas and water bills and train fares if the services were publicly financed.

– Private electricity, gas, water and rail companies pay out £12bn a year to investors and shareholders in interest and dividends.

– In total, cheaper government borrowing rates could save the UK public £6.5bn: £4.2bn on energy, £2bn on water and £352m on rail.

Their full study is available – HERE.

It is not just a matter of rising fares and charges. The research clearly demonstrates that service quality – reliability, puncuality, attention to complaints etc – has also deteriorated across the privatised infrastructure services.

The vintage of the rail capital stock is now older – private companies have an incentive to run down the quality of the infrastructure they take over as the imperative for short-term profits dominate.

The pay of the CEOs in the privatised companies also regularly scandalises the public. Research by the UK group – The High Pay Centre – which is a non-aligned centre that aims to “monitor pay at the top of the income distribution”, provides a comprehensive analysis of rampant corporate power and the CEO feeding frenzy.

In their report – Winners and Losers – they conclude that:

Whilst investors have done well from privatisation, many are overseas so the UK consumer pays the price and the foreign investor reaps the dividend. The biggest winners are the executives at the top of the companies who have benefited from multi-million pound pay-outs for doing a job that paid a civil servant’s wage prior to privatisation.

They also note that while the Government initially received payments for the sales of public infrastructure, they also had to “write- off many companies’ debts and take on pension obligations in order to complete the sale” and later provided significant subsidies to the privatised companies. In the case of National Rail, the Government “effectively re-nationalised” it to redress the failure.

It should be noted that the privatisation program was continued by the Labour Government in the UK as it attempted to demonstrate its neo-liberal credentials. The infestation has been on both sides of politics, which is the main problem for citizens – who do they turn to as an alternative.

Once the major assets were sold off, privatisations morphed into so called Public-Private Partnerships (PPPs) and Private Financial Initiatives (PFIs) as the vehicles to provide and operate on-going public infrastructure and also public service delivery was outsourced.

In the case of rail services in the UK, the first major move was the Conservative government’s British Coal and British Rail (Transfer Proposals) Act 1993 (under John Major’s Prime ministership).

Since that time, while fares have risen more than “three times the rate of inflation”, even though the privatised operators continued to receive support from the government via subsidies.

The UK Trade Union Council released a report they commissioned from academic researchers last year (June 3, 2013) – THE GREAT TRAIN ROBBERY: Rail Privatisation and After – which documents the on-going transfers from the government to the privatised rail operators.

This is a familar tale around the world.

All the promises held out by the proponents of privatisation (drawn from the mainstream microeconomic textbooks) have failed to materialise:

1. “better, cheaper service for rail users requiring less subsidy” from the public purse. Wrong! Public subsidies have risen each year by billions of pounds.

2. More investment in capital infrastructure. Wrong! Privatisation has “failed to bring in adequate private investment in track or trains (pp. 24-5) so that average age of rolling stock has actually increased …”

3. The risk of operation would be transferred from the public sector to the private operator which would motivate efficiencies. Wrong! What actually has happened is that:

… risk and investment averse private companies positioned themselves as value extractors, thanks to high public subsidies. Government effectively took the operating risk, covering operating deficits and supplying investment funds.

The low-cost operations private substantial private returns “with downside risks passed to the state”.

4. Better than the public owned operation. Wrong. The evidence is that once British Rail was reorganised and funded properly so that infrastructure improved it “could achieve better than European mainland level of efficiency”. Those gains were “lost after privatisation”.

The UK Guardian article (first cited) thus concludes that:

Profits could be used to reduce our fares – instead they are handed over to shareholders. Privatisation has failed and passengers are the ones who suffer as a result.

Anyone who lives in or travels to Melbourne, Victoria and uses public transport will understand all of this – except the neo-liberal zealots who continue to deny reality.

In 1999, imbued with Monetarist religious fervour with Margaret Thatcher as their role model, the then conservative Victorian government launched on a so-called market reform agenda of public transport, which involved the privatisation of Melbourne’s train and trams, which provided the core mass transit network for the city.

Please read my blogs – Public infrastructure 101 – Part 1 and Welcome to the world of privatised electricity and canned music and The glorious gouging of the public purse – for more related discussion on this point.

Initially, following the failed British model, three overseas companies were offered ‘franchises’ with the usual promises: better services, more public patronage and revenue and lower public outlays.

It didn’t take long for the private firms to demand higher subsidies beyond those provided for in the initial public-private contracts.

The system was struggling for reliability and punctuality and investment in infrastructure lagged.

The academic research report – Putting the Public Interest Back into Public Transport – (released April 2006) notes that with the performance of the transport system becoming a political embarrassment, the State Government (by then a Labor government, which had claimed it was opposed to the privatisation – yeh, right!) “re-hired the officials who had presided over the 1999 privatisation to advise it”.

The outcome was predictable – massive increases in the public subsidies to the private operators and “the franchisees’ service obligations under the 1999 agreements” were relaxed.

Soon after (2002) and despite the increased subsidies, “the UK firm National Express announced in December 2002 that it was pulling out of its Melbourne tram and train operations”. The Government took the services back over – that is, no risk was ever transferred to the private operator.

The only thing that was transferred was the capacity to extract value under the assistance of public subsidies.

To persuade the other two operators to take over the National Express services, the State Government agreed to huge price hikes (well in excess of inflation).

Analysis shows that the promises of privatisation have never been realised in the Victoria public transit system since it was sold off.

1. Fares have risen ahead of inflation and without justification in higher costs. Value extraction remember.

2. Performance data available shows that the accepted evaluation measures – reliability and punctuality – have deteriorated since privatisation.

3. The infrastructure capacity has not kept pace with demand and with poor service delivery, patronage fell, which placed further pressure on the road networks.

4. Public subsidies have risen since privatisation in real terms.

The late Paul Mee, an academic who was a tireless campaigner for public transport based on his research evidence, produced a study in 2004 – Privatization of Rail and Tram Services in Melbourne: What Went Wrong? – which documented the early failure of the privatisations.

His data is compelling.

He also notes that the Victorian government was captured by the privatisation process. He documents the failure of the privatisation:

… winning a tender on an artificially low bid, with a view to renegotiating that bid upwards at a later stage by threatening service disruption, presuming that government will be unable to resist political pressure on service continuity …

This is exactly what happened in the UK. Upon getting the contracts, the UK operators sought to renege on the contract terms by threatening political embarrassment (for example, the case of the UK Channel Tunnel Rail Link).

More recent data available from Public Transport Victoria and published in the journal – Track Record – tells us that the reduced services and higher costs of the privatised Victorian system were not just teething troubles.

In 2002-03, Metropolitan trains were on time 95.6 per cent of the time. By 2012-13, this had fallen to 92.1 per cent.

In terms of reliability, the percentage of the timetable delivered has also fallen over the last decade.

Conclusion

Privatisation, franchising, outsourcing, PPPs, PFIs, and all the rest of the devious transfers of public wealth and funds to the private sector have systematically failed to deliver on the promises made by the consultants.

The stockbroking and legal companies and economists who advised governments in these public robberies have all done very well.

Many private firms have done very well – enjoying the best of both worlds – a captive infrastructure, ability to gouge consumers via excessive fares, no real need to keep the quality of service up to acceptable standards, and increasing public subsidies.

The microeconomic failures that have accompanied neo-liberalism are the analogues to the macroeconomic failures that I normally write about.

The two are linked of course. One of the principle justifications for the sell-offs was the alleged need to resolve fiscal crises.

Both the claims about fiscal crises (the need for fiscal surpluses) and the promise of superior services etc are erroneous.

Attacking both levels of myth-making has to be a core part of the progressive agenda.

Interview with MMT Group in Rome, November 24, 2014

Here is a short interview I did with an Italian MMT group, Il Centro Studi Economici per il Pieno Impiego (CSEPI) (The Centre for Economic Studies for Full Employment) after my presentation at the Rome 3 University on November 24, 2014.

Thanks to Aldo, Fabio, Jacopo, Gianluca, Francesca and Francisco for putting this together. It runs for 11 odd minutes.

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.