There was an interesting article written in the London Review of Books (September 13, 2012) by regular contributor James Meek in – How We Happened to Sell Off Our Electricity (you need to subscribe to read it). It discussed how the obsession with privatisation in Britain, which was meant to reduce state control of this sector, has led to the state still being dominant in electricity production. The only problem for the British is that the French government now owns a large swathe of the ‘privatised’ British electricity industry. The outcome demonstrates the absurdity of the whole privatisation debate. This example is not unique. State-owned enterprises have eaten up inefficient privately owned firms all around the world as governments sell off public assets in the belief that prices will fall, services will improve and costs will be lower. The reality now some 35 years or so into the privatisation experiment is that none of these claims have been realised. In many cases, costs are higher and the privatised firms rely on higher public subsidies than was the case when the operations were completely in public hands. Prices are no uniformly lower after privatisation. Profit-seeking firms seek to gain by cutting costs and under investing in essential infrastructure, which leads to poor outcomes for Society (blackouts, poor repair times etc). And, millions of jobs have been lost in this cost-cutting mania. As a result, we argue that a ‘Progressive Manifesto’ must include the case for re-nationalisation of many sectors, which are intrinsic to advancing the well-being of Society. Progressive parties should start researching and demonstrating how this policy will take us into the next century where green, sustainable production is the norm and there are high levels of public service available from these key sectors, rather than allow critics to argue that the re-nationalisation agenda is just a return to the dark old days of inefficient state enterprises where cronyism, nepotism and corruption was rife.
In the first part of this blog (July 13, 2016) – Brexit signals that a new policy paradigm is required including re-nationalisation – I suggested that re-nationalisation of certain sectors has to return as a key industry policy plank for any aspiring progressive political party.
I have written about this in previous blogs (among others) which you can consult for reference and background purposes:
1. Privatisation … was yesterday’s joke (March 6th, 2009).
2. Public infrastructure 101 – Part 1 (March 20, 2009).
3. Public ownership rules airport rankings! (June 9th, 2009).
4. Nationalising the banks (October, 26, 2010).
5. Public infrastructure does not have to earn commercial returns (December 20th, 2010)
6. Qantas should be nationalised (again) (November 3, 2011).
7. Welcome to the world of privatised electricity and canned music (October 3, 2012).
8. Privatisation failure – the micro analogue of fiscal surplus obsessions (January 6th, 2015).
In this second part, I expand on that assertion to give it some evidence base.
Privatisation didn’t work
There is a litany of evidence after 30-40 years of practice to show that the promises held out for privatisation of large state enterprises have not been delivered.
Privatisation was one of the first planks of neo-liberalism and governments around the world, increasingly infested with the Monetarist virus, rushed to outdo each other in how many state assets they could sell in the shortest possible time.
Legal firms and management consultants made a fortune in assisting these governments in what were often fire sales. Politically, a failed privatisation was seen as a disaster and to avoid that ignominy, governments sold assets at well below any reasonable market value to ensure the sales were quick.
Then they could parrot their neo-liberal epithets such as “we are all shareholders now” or “we are all capitalists now” as if that would convince us that the basic class divisions in capitalism were gone and we were all seeking profit.
Privatisation was part of the swing to market-based allocations and a blurring of public interest with private profit. The two rarely go together if ever.
Around the world, neo-liberal politicians in the pay of the lobbyists for big capital have privatised:
1. State banks.
2. Publicly-owned airlines and airport infrastructure.
3. State prison systems.
4. Energy generation, distribution and retailing.
5. Public transport systems.
6. Public hospitals and health care facilities.
7. Public employment services.
8. Public telecommunications.
9. Public water and sewerage utilities.
10. Public postal services.
among other central aspects of our Society.
The evidence suggests that none of these transfers to private ownership have resulted in improvements in the well-being of the Society.
In some case, the privatisation failed outright and the asset was returned back into public ownership (for example, Swissair) because the state maintained the risk of the activity (such as a hospital), despite the claims by proponents of privatisation that a major advantage of the sale was that the risk shifted to the profit-seeking private owner.
In the case of large-scale national infrastructure, the risk can never be shifted from the public to the private domain.
A maximum security women’s prison (Dame Phyllis Frost Centre) in Victoria (Australia) was built as a private enterprise in 1996. By October 2000, the Victorian government was forced to assume ownership and control after its private owners (Corrections Corporation of Australia) were deemed to have seriously mismanaged the facility. So much for the risk transfer!
The case for state ownership is particularly strong where the sector is characterised by what we call natural monopoly.
A natural monopoly arises when the infrastructure costs of setup are high and the resulting market can only support one supplier. The single firm can exploit so-called economies of scale (size advantages) which reduce their operating costs to ensure the product/service is supplied at the lowest possible price.
The telecommunication, mass transport, postal services, electricity and water sectors are often considered to be prime natural monopolies.
In other words, in these sectors, transfer of ownership will just create a private monopoly, which then needs heavy regulation to ensure it delivers socially beneficial outcomes.
In the London Review of Books blog (June 19, 2009) – Liberté, Egalité, Electricité – James Meek wrote:
I paid my electricity bill today, and spent some time trying to work out how much of my bill goes to the French government to defray the costs of running that large, complex and hexagonal country. I don’t live in France. I live in London and, like millions of other Britons, buy my electricity from EDF, aka Electricité de France, which snapped up three of England’s privatised electricity minnows in 2002. Privatisation, a policy supposed to liberate us from the burden of allegedly inefficient state-owned industries, has led to more than five million households and businesses in this country buying electricity and gas from a state-owned industry in that country.
The French power company EDF is “85 per cent owned by the French government”.
He later expanded on that discussion in his 2012 LRB article cited in the Introduction. His central thesis, in relation to the privatisation of electricity in Britain, is that:
What has happened is not what they promised or intended when they put Britain’s state-owned electricity industry on the block.
While Margaret Thatcher berated the people with claims that the privatisations would reduce the role of the state in electricity sector the reality is that “the future of Britain’s energy supply now hinges on state-owned French companies based in Paris”.
Thatcher’s “patriotic tones of of how, with millions of people buying shares in former state industries, privatisation was giving ‘power back to the people'” have been shown by the reality to be hollow.
James Meek concludes that rather than give “power back to the people”, the privatisations have taken the “power away from the people”.
He considers Thatcher’s ideological pursuits to be “naive” because she failed to realise that other nations (such as France) were not going to privatise these key sectors but would exploit the British folly and ‘renationalise’ British assets that Thatcher had privatised.
But it has been a case of “Renationalised … for France”.
James Meek documents the poor results that followed the early privatisations – major job losses, price gouging, massive profits, and reduced investment levels.
He documents the shift to gas-fired power which then compromised the profitability of the coal-fired technology and flooded the market with electricity that, in turn, undermined the viability of many firms within the industry that could no longer compete on costs.
Further, while wholesale electricity prices fell dramatically “customers saw no change in their bills”. The “squeeze in profits” brought about by the entry of gas-fired power stations did not benefit consumers. The private owners who could reduce costs the quickest were the beneficiaries.
The reality was that “(e)xcessive profit margins simply shifted from one set of electricity companies to another”.
And then the French arrived.
James Meek summarises the period of privatisation in this way:
Electricity privatisation hasn’t been a success in bringing down prices. Most recent figures suggest that British prices are typically right in the middle of the European average … It has been a failure in terms of British industry and management; the best measure of the scale of folly and betrayal by politicians of both parties is the simple fact that a reliable, badly run British electricity system was destroyed, rather than being reformed, only so that a large part of it could be taken over by a foreign version of the original. And it has been a failure in terms of clarity, in the sense that in order to fund investment, governments that boast about not raising taxes, or of taking low-earners out of the tax bracket, permit predominantly foreign-owned electricity companies to collect flat-rate taxes that hit the poor disproportionately.
In my homestate Victoria (although I now live mostly in NSW), the neo-liberals privatised electricity in the 1990s.
Prior to that the the electricity supply was very reliable and provided via the State Electricity Commission (SEC), a government owned power utility. The SEC was created in 1926 and was abolished in 1994.
During its period of operation, the SEC held a monopoly over the generation, transmission and supply of electricity, consistent with the view that power was a public service and a responsibility of the state to ensure it was supplied to all citizens at equitable prices.
The aim of the SEC was unambiguously to provide a public service – in this case, electricity – and it did so in a reliable fashion at a decreasing real price even though it was faced with continually increasing demand for its services as the population and industry grew in the Post-WW2 period.
Please read my blog – Welcome to the world of privatised electricity and canned music – for more discussion on this point.
Cahill and Beder (2005) provide incontestable evidence that the SEC was efficient, despite the claims to the contrary by the government of the time, which was intent on privatising at all costs.
[Reference: Cahill, D. and Beder, S. (2005) ‘Neo-liberal think tanks and neo-liberal restructuring: Learning the lessons from Project Victoria and the privatisation of Victoria’s electricity industry’, Social Alternatives, 43-8. LINK]
They argue that:
The Electricity Supply Association study of 1000 utilities around the world found that SECV was in the top ten for efficiency of resource use and that it was also highly efficient in terms of technical efficiency of distribution. And a study by London Economics in 1994 found SECVs resource efficiency compared favourably with best practice utilities worldwide …
But by the early 1990s the neo-liberal forces were building and were determined to privatise anything that moved and had value that could be redistributed to the private sector (specifically a few wealthy interests that funded their think tanks and probably their personal incomes).
The push for privatisation – the so-called “Project Victoria” – was:
… an initiative of the Melbourne-based neo-liberal think tanks the IPA and Tasman Institute along with thirteen employer groups including the Australian Chamber of Manufacturers, the Business Council of Australia (BCA), the State Chamber of Commerce and Industry, the Victorian Employers Federation and the Victorian Farmers Federation. Commencing in 1990, the purpose of Project Victoria was two-fold: to prepare a radical neo-liberal agenda for the Liberal Party which, it was hoped, would win government; and, to put radical neo-liberal ideas on the public and political agendas in Victoria. Project Victoria was far reaching. It covered water, ports, electricity, public transport and workers compensation. Tasman and IPA prepared a number of reports and strategies on these issues between 1991 and 1993. In the lead up to the 1992 Victorian election, there were close links between Project Victoria and the Victorian Liberal leadership.
While the think tanks pumped out reports which claimed to show how inefficient the SECV was and how it should be broken up and privatised – with competition introduced to each of the stages of production and service delivery – supply, generation and distribution – the reality was quite different.
After the SECV was split into three parts – generation, transmission and distribution and supply – Victorians initially endured increased blackouts, as the private operators cut back on investment in order to increase profits.
By the turn of the century some 8 or so years into the experiment, electricity prices had increased by some 60 per cent (Cahill and Beder, 2005).
Generating capacity was becoming compromised and the generating companies were becoming increasingly subjected to mergers and takeovers, which increased the concentration in the sector and pushed up profits.
And it became clear that the privatised electricity providers increasingly gorged themselves on huge executive salaries.
And article in the Fairfax Sydney Morning Herald ((October 1, 2012) – Chiefs on a power trip to higher salaries – revealed that:
For example, the AGL boss just received an “85 per cent pay increase to $6.3 million” and the boss of Origin Energy snaffled a pay package worth $A8.35 million at a time when customer satisfaction has plummetted.
The SMH concluded that:
Customer satisfaction is obviously not a measure to which CEO salaries are closely pegged. Business Day found AGL had delivered the least value for money for shareholders. Earnings per share, the cleanest measure of value for shareholders, dropped 80 per cent to 23.8 cents per share last year. Despite a generous rise in executive remuneration, the big retailer managed only a 2 per cent increase in share price year-on-year and a 5 per cent increase in total revenue.
In Australian states where the electricity industry remained state-owned the evidence is that the “Bosses’ salaries … are a fraction of those for the listed companies”.
So not only have prices risen and service quality falling in the privatised states, but the companies are generating massive profits, which are being eaten up by massive (and totally unjustifiable) executive salaries.
This pattern of abuse runs throughout the privatised sector and provides a powerful case for re-nationalisation.
How re-nationalised enterprises can advance well-being
The point that James Meek makes in relation to French state companies dominating the privatised British electricity industry opens up another discussion that is relevant.
The 2010 study by Paul Cohen – Lessons from the Nationalization Nation: State-Owned Enterprises in France – which I cited in Part 1 of this discussion, outlined how France did not go down the privatisation route that was taken by the Anglo nations.
It is clear that the austerity turn by Mitterrand’s government in 1983 was a major neo-liberal shift in French policy making and set in place France’s acceptance of the Delors Report in 1989 and the Maastricht process two years later.
But while France clearly abandoned much of its Post-World War 2 planning ethos in favour of a German price stability obsession, it did not follow the Thatcher governments obsessive privatisation agenda.
Indeed, as Cohen notes:
France’s embrace of nationalization did not in fact begin with the Socialist François Mitterrand’s 1981 election to the presidency, but decades earlier and under a right-wing president. With France’s economy in ruins at the end of the Second World War, ravaged by German requisitions and Allied bombing, the post-Liberation provisional government led by Charles De Gaulle, with broad support across the political spectrum, launched a wave of nationalizations in order to direct the reconstruction effort. Between 1944 and 1946, the state took control of businesses in energy, transportation, and finance. Private coal companies were reorganized into the public mining giant Charbonnages de France; gas and electricity producers were likewise nationalized to create Électricité de France and Gaz de France. The state absorbed Air France. It nationalized the country’s eleven largest insurance companies, along with Banque de France and the four biggest commercial banks (including Crédit Lyonnais, Société Générale, and what would later become BNP) … Taken together, these measures transformed the state into a giant economic actor: in 1946, it directly controlled 98 percent of coal production, 95 percent of electricity, 58 percent of the banking sector, 38 percent of automobile production, and 15 percent of total GDP. Beginning with Jean Monnet, the first director of the General Commissariat for Planning, the government managed public enterprises and drafted five-year plans in order to shape long-term economic development.
And the large public ownership did not undermine overall growth in France nor productivity growth relative to the US and other more market-oriented nations.
In 1982, Mitterrand expanded the French public ownership by taking over various industries (defense, computers, pharmaceutical and banking).
By then Monetarism was rife, and both the conservative and Socialist parties in France, reversed some of the nationalisations during the 1980s and beyond.
Cohen argues that this:
… move away from state ownership was not in fact born of a rational economic calculus but rather of specific political choices.
The Right were infested with Monetarism and the Left was blinded “by its commitment to European unification and to France’s special relationship with its closest ally, Germany” (beginning with the austerity turn of Mitterrand), which meant France had to obey “the strict free market rules imposed by Maastricht and subsequent EU treaties” which “committed member states to privatization”.
The triumph of ideology over fact!
The facts were that the nationalised French industries were very successful.
The advantages that the nationalised industries gave the French government were many:
1. Cohen says that “successive governments used their stakes in France’s traditional smokestack industries to guide industrial reorganizations.”
This is particularly relevant for progressive aspirations for a green, sustainable energy sector based on renewables.
Public ownership allows the government to shift technologies within the energy sector more easily than if the sector is privately owned and operated.
The transitions from one labour intensive technology to renewable energy with less labour requirements is more easily managed with less cost to workers and their families given that the public sector can absorb the displaced workers more readily.
Cohen compares the impacts of the closure of coal-based power generation in France on the coal communities favourably with “Thatcherite Britain’s brutal mine closures and bloody union-police confrontations.”
2. Publicly-owned firms can ride out economic cycles more easily than for-profit firms. The subsidies to keep a public operation functioning in bad times are typically lower than socialising private losses (Cohen, 2010).
We saw during the GFC that many governments had to effectively nationalise several large banks to protect deposits. The fear of collapse would disappear if held in public hands.
Which then raises the question of rate of return. I covered that issue in this blog – Public infrastructure does not have to earn commercial returns – and demonstrated that some large public entities deliver community benefits that mean the concept of commercial profits is irrelevant.
Public service means just that!
3. Cohen provides evidence to show that even on commercial terms, publicly-owned enterprises that are largely producing for a consumer market, can be very successful. He uses the car industry to make his case.
He concludes that:
State management is no small part of the reason why France today is home to profitable automobile manufacturers whose product lines are focused on small, innovative, fuel-efficient cars.
The point that was lost in the privatisation debate is that the actual legal ownership status of the activity is not the reason for success or otherwise.
Organisations are successful if they have a culture of success. That culture can survive in private and public enterprises. Neither sector has a monopoly on successful organisational culture.
Which means that if a public enterprise is organised and managed well and understands that its primary charter is to deliver benefits that advance the well-being of the people then it is typically preferable to maintain its public status rather than compromise its objectives by forcing it to pursue private profit.
4. Cohen also shows that “public investment to be an invaluable tool for creating new industries and stimulating growth”, which is an argument we will deal with in more detail when we consider the literature on the entrepreneurial state and the role the state plays in innovation.
It is clear, that some state-owned enterprises have been disasters. But that sort of outcome is not exclusive to the public sector.
The GFC is testament to the fact that the private sector is capable of massive inefficiency and dysfunction.
Cohen concludes by saying that:
Over the entire period since the Liberation, French planning’s record of creating employment and prosperity is considerably better than neoliberal critics would have it. The state has used planning as a flexible tool to restructure companies and save jobs, to create new industries from scratch and promote job growth, to soften deindustrialization’s blow to workers and their communities, and to orient transportation and energy policy onto more sustainable pathways.
Which suggest that re-nationalisation should be part of a progressive policy agenda.
The arguments for privatisation based on textbook free market narratives, which were powerfully persuasive in the 1980s, have now been shown to be false.
Privatisation has accomplished many things (increased income and wealth inequality etc) but it has not delivered on the things that were claimed and used to justify the sell-offs.
It is time to rethink all of that and to understand the advantages that these state-owned sectors can play in advancing the well-being of Society and insulating it from the vicissitudes of capitalist fluctuations.
In the recent British Labour leadership tussle, it was argued by the now leader Jeremy Corbyn and one of the principal challengers Andy Burnham that the UK railways should be renationalised.
A recennt study (Badstuber, 2015) found that:
… the evidence suggests that integrating the UK’s expensive and fragmented rail network under public ownership could save hundreds of millions and also provide a better service.
[Reference: Badstuber, N. (2015) The case for re-nationalising Britain’s railways, August 28, 2015. LINK.]
And the people who use the service (the citizens) seem to agree. A 2014 survey from the London-based YouGov – Why the public want to nationalise the railways – showed that “British people support re-nationalising the railways by 60-20% – for the main reason that they should be accountable to taxpayers rather than shareholders”.
The three principal reasons given for thus support was accountability (62 per cent), lower fares (47 per cent) and increased cost effectiveness (43 per cent). Other concerns which drove the support for re-nationalisation were better working conditions for rail workers, better customer service, improved punctuality, and cleaner and more comfortable trains.
The results provide a damning assessment of the privatisation experiment which began in 1995 under the guise of “harnessing the management skills, flair and entrepreneurial spirit of the private sector to provide better services for the public” (see Secretary of State for Transport, 1992).
[Reference: Secretary of State for Transport (1992) New Opportunities for the Railways: The Privatisation of British Rail, White Paper, July, London, HMSO.]
A report prepared by the House of Commons Library (2013) showed that rail fares in Britain rose in real terms (that is, faster than the general inflation rate) after privatisation, especially for the long distance operators.
[Reference: House of Commons Library (2013) Railways: fares statistics,December 30, 2013. LINK.]
The House of Commons Library study found that by 2013, the real change in rail fares was 23 per cent.
The first phase of the privatisation specified under the 1993 Railways Act was a disaster. The private company responsible for the provise of rail network infrastructure proved to be incompetent – underinvesting and high cost – and a government body (Network Rail) had to be be created to take back the responsibility.
The so-called management excellence that the Tories foreshadowed in its early justifications for privatisation has proven to provide nothing more than a highly subsidised, inefficient service that does not advance the well-being of British society.
On December 17, 2012, the House of Commons received a report from the Transport Committee (2012), which showed that the total subsidy to the rail industry had risen (in real terms) from around “£2.75 billion (in 2011-12 prices) in the late 1980s to £4 billion today”.
[Reference: British Transport Committee (2012) Transport Committee – Seventh Report Rail 2020, December 17, 2012. LINK.]
Clearly, the railways in Britain continue to rely heavily on British government payments for survival (and profitability).
Badstuber (2015) outlines a viable path to re-nationalisation based on the expiry of the current franchises. She says that the British government could steadily re-create an integrated network and service by taking the franchises “back into the public sector one piece at a time, at no cost.”
She lists the benefits of the railways re-nationalisation (which are common for other large re-nationalisations) as:
1. Government would get the dividend payments not the private shareholders. Although this is a point commonly made by progressives who advocate re-nationalisation, from an Modern Monetary Theory (MMT) perspective the benefits to the public coffers only matter if the government running the services does not issue its own currency.
So in Australia, the railways are run by State governments (rather than the Federal government) and the increased revenue would allow the government to reinvest the funds to maintain a high quality service.
2. A range of so-called ‘savings’ on “subcontractors”, the operation of the tendering system and administrative costs of the regulative environment would be achieved.
Again, the issue for a national government is not that it cannot make these payments – it clearly can as the currency issuer. The real issue is why should it divert public spending into areas that do not advance public benefit but help to underwrite profits for a small group of shareholders, who would otherwise own insolvent companies.
But, more so, is that argument that the major arguments for privatisation – lower costs, lower prices, better services etc – have not been delivered.
It is clear that the railways in Britain (and elsewhere) should return to public ownership and used as part of a new strategy to take cars off the road and improve the attractiveness of mass transport systems.
Re-nationalising the banking system would eliminate the largely unresolvable tension that exists in the current system where banks occupy a special protected place and are not really allowed to fail by dint of government support (implicit or otherwise) yet at the same time behave just like risk-taking entrepreneurial firms, paying exorbitant executive salaries and skewing their operations to the interests of their shareholders.
The tension between the public nature of banking and the intrinsic social role they play and the greedy pursuit of private profit – or the privatisation of profit and the socialisation of loss – is palpable and unsustainable.
Socialisation the profits and loss and steering the activities of banks 100 per cent towards the advancement of public purpose would go a long way towards eliminating the worst features of the banking system which culminated in the global financial crisis.
The nationalisation of banks would mean that a key social institution is serving only one master – the public rather than compromising its public charter to line the coffers of their private owners.
When we consider the essential progressive reforms to the financial system in a later blog, a starting point will be to return banks to being banks rather than gambling casinos.
Part of that process, should be the re-nationalisation of the banking sector.
There is now ample evidence available which shows that the major arguments used to justify the wide-scale privatisations in the 1980s and 1990s have not been shown to have substance.
There is no unambiguous evidence that shows the the privatised sectors now offer lower costs, lower prices, better services and better working conditions.
It was often claimed that the privatisations would just shift workers from the public sector to the private sector and as a result their pay would rise in line with superior productivity growth arising from the better management.
What happened was that the major job losses were accompanied in many cases by suppressed wages growth and worsening conditions of work.
A progressive policy agenda should embrace re-nationalisation and a way to reduce the uncertainty for workers arising from the private spending fluctuations and to use these public enterprises as vehicles to accomplish necessary technology changes in areas such as mass transportation, energy and water.
They should use a nationalised banking system to help stabilise financial markets and reduce the likelihood of another GFC arising, which was the direct result of a deregulated financial system running out of control through greed and corruption.
These large sectors, which provide necessary goods and services to citizens, should always be in public hands, with a service ethic rather than an ambition for private profit and cost cutting.
The series so far
This is a further part of a series I am writing as background to my next book on globalisation and the capacities of the nation-state. More instalments will come as the research process unfolds.
The series so far:
The blogs in these series should be considered working notes rather than self-contained topics. Ultimately, they will be edited into the final manuscript of my next book due later in 2016.
That is enough for today!
(c) Copyright 2016 William Mitchell. All Rights Reserved.