Privatisation : Success or Failure?

I notice that a recent article from the FT and sign-posted on Facebook by David Raho has prompted some discussion on Facebook:-  

The pendulum swings against privatisation

Political fashions can change quickly, as a glance at almost any western democracy will tell you. The pendulum of the politically possible swings back and forth. Nowhere is this more obvious than in the debates over privatisation and nationalisation. 

In the late 1940s, experts advocated nationalisation on a scale hard to imagine today. Arthur Lewis thought the government should run the phone system, insurance and the car industry. James Meade wanted to socialise iron, steel and chemicals; both men later won Nobel memorial prizes in economics. 

They were in tune with the times: the British government ended up owning not only utilities and heavy industry but airlines, travel agents and even the removal company, Pickfords. The pendulum swung back in the 1980s and early 1990s, as Margaret Thatcher and John Major began an ever more ambitious series of privatisations, concluding with water, electricity and the railways. The world watched, and often followed suit. 

Was it all worth it? The question arises because the pendulum is swinging back again: Jeremy Corbyn, the bookies’ favourite to be the next UK prime minister, wants to renationalise the railways, electricity, water and gas. (He has not yet mentioned Pickfords.) Furthermore, he cites these ambitions as a reason to withdraw from the European single market. 

Privatisation’s proponents mention the galvanising effect of the profit motive, or the entrepreneurial spirit of private enterprise. Opponents talk of fat cats and selling off the family silver 

That is odd, since there is nothing in single market rules to prevent state ownership of railways and utilities — the excuse seems to be yet another Eurosceptic myth, the leftwing reflection of rightwing tabloids moaning about banana regulation. Since the entire British political class has lost its mind over Brexit, it would be unfair to single out Mr Corbyn on those grounds. 

Still, he has reopened a debate that long seemed settled, and piqued my interest. Did privatisation work? Proponents sometimes mention the galvanising effect of the profit motive, or the entrepreneurial spirit of private enterprise. Opponents talk of fat cats and selling off the family silver. Realists might prefer to look at the evidence, and the ambitious UK programme has delivered plenty of that over the years. 

There is no reason for a government to own Pickfords, but the calculus of privatisation is more subtle when it comes to natural monopolies — markets that are broadly immune to competition. If I am not satisfied with what Pickford’s has to offer me when I move home, I am not short of options. But the same is not true of the Royal Mail: if I want to write to my MP then the big red pillar box at the end of the street is really the only game in town.

Competition does sometimes emerge in unlikely seeming circumstances. British Telecom seemed to have an iron grip on telephone services in the UK — as did AT&T in the US. The grip melted away in the face of regulation and, more importantly, technological change.

Railways seem like a natural monopoly, yet there are two separate railway lines from my home town of Oxford into London, and two separate railway companies will sell me tickets for the journey. They compete with two bus companies; competition can sometimes seem irrepressible. 

But the truth is that competition has often failed to bloom, even when one might have expected it. If I run a bus service at 20 and 50 minutes past the hour, then a competitor can grab my business without competing on price by running a service at 19 and 49 minutes past the hour. Customers will not be well served by that. 

Meanwhile electricity and phone companies offer bewildering tariffs, and it is hard to see how water companies will ever truly compete with each other; the logic of geography suggests otherwise. 

All this matters because the broad lesson of the great privatisation experiment is that it has worked well when competition has been unleashed, but less well when a government-run business has been replaced by a government-regulated monopoly. 

A few years ago, the economist David Parker assembled a survey of post-privatisation performance studies. The most striking thing is the diversity of results. Sometimes productivity soared. Sometimes investors and managers skimmed off all the cream. Revealingly, performance often leapt in the year or two before privatisation, suggesting that state-owned enterprises could be well-run when the political will existed — but that political will was often absent. 

My overall reading of the evidence is that privatisation tended to improve profitability, productivity and pricing — but the gains were neither vast nor guaranteed. Electricity privatisation was a success; water privatisation was a disappointment. Privatised railways now serve vastly more passengers than British Rail did. That is a success story but it looks like a failure every time your nose is crushed up against someone’s armpit on the 18:09 from London Victoria. 

The evidence suggests this conclusion: the picture is mixed, the details matter, and you can get results if you get the execution right. Our politicians offer a different conclusion: the picture is stark, the details are irrelevant, and we metaphorically execute not our policies but our opponents. 

The pendulum swings — but shows no sign of pausing in the centre.

Tim Harford

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From Facebook:-

Privatisation undoubtedly works in some markets but definitely not in others. I am not opposed to some involvement of the private sector in the delivery of public services where this is subject to well formulated contracts, tight public sector governance and oversight, and private companies involvement is strictly in the interest of proven cost effective service delivery i.e. cleaning, IT and vehicle leasing to free up money to invest in core services. It should never be contracted for ideological reasons.

However, the experience in England and Wales criminal justice system where the provision of core services has been outsourced and privatised for ideological reasons as opposed to evidence based reasons indicating that privatisation would result in improved service delivery not just reduced financial costs is a good example of how not to privatise. Increasingly the evidence coming out of the criminal justice system in England and Wales suggests that privatisations in one form or another whether in prisons tagging Probation or courts by successive administrations have at best been flawed and at worst a reckless gamble with public safety.

The market has simply failed to drive or deliver improvements in respect of reoffending or innovative interventions. Time for government to reconsider their approach. David A Raho

You cannot create a market where one wouldn't freely exist and certainly not as a cost saving measure...the ridiculousness of the dogma is hard to believe. And so often, especially with central government, their capacity to ensure any kind of accountability has been proven to be nil. The irony at the heart of the debate is that Government's incompetence at managing contracts has fuelled arguments that governments can't be trusted to run anything - hence providing cover for those promoting privatisation to make money for their mates and donors. We must remember this when arguing for alternatives to replace failing privatised contracts. Publicly owned and locally accountable doesn't mean state run. Dean Rogers

As we know the so called ‘Justice Market’ was artificially created by those in the coalition government who no doubt sincerely believe that the de-establishment of a national Probation service consisting of devolved Trusts and the establishment of a competitive market with a mixture of providers of services - even if artificially created - is the most effective means of disrupting, re-forming, and bringing innovation, into a system that appears to have reached a plateau in terms of outcomes. This is a seductive idea that at the time generated little actual opposition in Parliament when put to the vote as there appeared to be some sense to the majority of MPs in trying something else to improve on a system that had hitherto delivered slow but fairly steady improvement and that although not actually failing was successfully portrayed - however unjustly - as demonstrably failing to address reoffending in respect of a significant group of offenders (never mind the history as to why they hadn’t been required to work with them).

The argument against such a politically seductive and undeniably bold and novel approach is that its obviously intended disruption predictably introduced greater potential for inconsistency, problems around accountability, and the real risk of both corruption and failure, into a system that should be publicly accountable, well governed, consistent and robust. Splitting and dismantling a system that needs a degree of unity and stability in order to function generates far greater problems than it could ever hope to solve.

I agree that when looking at alternatives that publicly owned and locally accountable doesn’t necessarily mean state run. My personal preference is for a devolved justice system as probation services are delivered best when an easily recognisable probation organisation is fully engaged with and integrated within the communities they are meant to serve. This assumes a degree of national standardisation is both necessary and desirable and that such a service cannot be effectively delivered by a system comprised of a separate centrally controlled national service and an increasingly unsustainable and diverse hotch potch of other providers with various commercial interests that are compelled to operate in an artificially created market distorted by political and corporate interests. David A Raho

Agreed. Disrupted could be devastated and I think there was, especially by the time we'd finished with the Lords, quite a lot of parliamentary opposition and scepticism, some of which is now helping the push for a full review - a key step towards a new system. We strongly agree on localisation of delivery and accountability and, I think, as much unity in provision. The state is proving itself to be as hopeless as any privateer in actually delivering. The rebuilding must start with independent localised commissioning. Also see the piece I'll be publishing on Napo's site early next week in response to HMIP inspectors speech last week 're standards. Dean Rogers