Will Hutton
For 30 years, privatisation of public assets has been portrayed as
an easy win-win.
The state gets a much-needed one-off boost to its revenues and the now privatised business gets all the dynamic benefits of private ownership.
It will be more efficient, prices will be lower, subsidies reduced and a regulator will act as a long stop to ensure that the public interest is protected. What could be better than that?
Britain pioneered privatisation, but other countries have eagerly followed.
All around the world, super-rich plutocrats have emerged, growing fat on privatised plunder – Russian and Latin American oligarchs can thank privatisation for their riches. So can Virgin's Richard Branson and Stagecoach's Brian Souter.
But at least the quid pro quo is that assets have been better managed than they would have been under the "dead" hand of the state.
Or have they? And is privatisation quite the panacea it is alleged to be?
It will take years for the lazy assumption that privatisation is always best to be turned around, but there are already straws in the wind.
First, there was the fiasco of the Royal Mail privatisation, where already the new owners and managers are questioning how long they can sustain universal postal provision. Then there was the monumentally misjudged low price at which the shares were sold.
Now privatisation is being questioned on a second front.
The next round of rail fare increases will mean that fares will have risen by almost a quarter since 2010.
Given the chancellor's ambitions to eliminate the public sector deficit solely by spending cuts, thus reducing further subsides to the rail industry, another 24% rise is in prospect by 2018.
This is devastating.
British rail fares, the highest per passenger mile of any country in Europe, are set to become higher still. This is a poll tax on wheels, to many, an unavoidable impost that must be paid at the same rate by rich and poor alike, even though rail transport is an indispensable public service.
Small wonder that rail renationalisation is emerging as one of the most popular policies with voters.
In London and the southeast, high property prices make incredibly expensive commuting the only viable option for many first-time buyers; mortgage repayments and fares constitute almost half of their disposable incomes.
Commuters suffer overpriced, crowded trains and unacceptable unpredictability in their service.
They are but pawns – overcharged and underserved and told by centre-right politicians how happy they should be because they use a privatised industry.
After all, investment is booming, passenger numbers rising and safety is better. It's not all bad.
But at what price?
Voters are right – the system may be improving but it is incredibly expensive. Even buying the right ticket is a minefield.
Conceptually, it was absurd to divide the network from the train companies that run on it; any rail system works as an integrated whole.
It was equally a conceptual disaster to imagine that because each train licence is of necessity a monopoly – you can't have two services from London to say Manchester competing against each other – the monopoly had to be temporary with renewable licences auctioned at 10-year intervals.
As a result, the holders are invited to be short-term value extractors rather than long-term value creators, hired hands to drive down costs paying high dividends to whatever tax haven.
What's more, it was crazed to believe a public good required minimal or no public grants. Lastly, it was asinine not to understand that private capital demands financial returns well above the cost of capital available to the low-risk state.
As a result, there have to be never-ending and ongoing efficiency gains beyond the initial round of layoffs and wage cuts to deliver those extra returns.
That cannot be done even by the hand of God.
The only recourse is poorer service provision, structuring activities through offshore tax havens to avoid tax and ever higher fares.
The bits of the system that work are those that have been redesigned to accept economic logic and the "publicness" of what is of necessity a public monopoly network.
The collapse of Railtrack in 2001 after the Hatfield disaster forced the creation of Network Rail, a not-for-dividend statutory corporation limited by guarantee, an elaborate organisational con to avoid the dread words "public company" and "nationalisation", even though it is 100% owned by the state.
The de facto state backing has allowed it to run up borrowing of £30bn to finance rail investment, but at higher rates of interest than if it had been openly acknowledged that it was publicly owned.
The cumulative extra servicing cost is more than £150m, but as the Office for National Statistics is now calling for the con to be ended and the debt reclassified as public debt, it's all for nothing.
Brilliant.
Directly Operated Railways is the 100% publicly owned company that took over the east coast mainline when the incompetent private operator walked away from its obligations in 2009.
Five years of public ownership and it is now the best run and most efficient operator, making a net surplus of £16m for the taxpayer.
Its reward? To be sold back to a private operator next February that will redirect the surplus through a tax haven as dividends, game the Department for Transport for higher government support and walk away if the financial returns are not good enough.
Thus the benefits of British-style private ownership in a public network.
Meanwhile, the absurdities of privatisation continue.
Two of the three companies that own the rolling stock leased to the train operating companies are owned in Jersey, the third is owned in Luxembourg. None shows any interest in supporting rolling stock manufacture in the country they so casually pillage.
The ultimate owner of Virgin trains are Branson's family trusts in the Virgin Islands. Operating in a tax haven allows him to move from business to business without massive tax liabilities. As he says: "If we had not done it the way that we did, Virgin would be half the size it is today".
His candour is refreshing.
The state gets a much-needed one-off boost to its revenues and the now privatised business gets all the dynamic benefits of private ownership.
It will be more efficient, prices will be lower, subsidies reduced and a regulator will act as a long stop to ensure that the public interest is protected. What could be better than that?
Britain pioneered privatisation, but other countries have eagerly followed.
All around the world, super-rich plutocrats have emerged, growing fat on privatised plunder – Russian and Latin American oligarchs can thank privatisation for their riches. So can Virgin's Richard Branson and Stagecoach's Brian Souter.
But at least the quid pro quo is that assets have been better managed than they would have been under the "dead" hand of the state.
Or have they? And is privatisation quite the panacea it is alleged to be?
It will take years for the lazy assumption that privatisation is always best to be turned around, but there are already straws in the wind.
First, there was the fiasco of the Royal Mail privatisation, where already the new owners and managers are questioning how long they can sustain universal postal provision. Then there was the monumentally misjudged low price at which the shares were sold.
Now privatisation is being questioned on a second front.
The next round of rail fare increases will mean that fares will have risen by almost a quarter since 2010.
Given the chancellor's ambitions to eliminate the public sector deficit solely by spending cuts, thus reducing further subsides to the rail industry, another 24% rise is in prospect by 2018.
This is devastating.
British rail fares, the highest per passenger mile of any country in Europe, are set to become higher still. This is a poll tax on wheels, to many, an unavoidable impost that must be paid at the same rate by rich and poor alike, even though rail transport is an indispensable public service.
Small wonder that rail renationalisation is emerging as one of the most popular policies with voters.
In London and the southeast, high property prices make incredibly expensive commuting the only viable option for many first-time buyers; mortgage repayments and fares constitute almost half of their disposable incomes.
Commuters suffer overpriced, crowded trains and unacceptable unpredictability in their service.
They are but pawns – overcharged and underserved and told by centre-right politicians how happy they should be because they use a privatised industry.
After all, investment is booming, passenger numbers rising and safety is better. It's not all bad.
But at what price?
Voters are right – the system may be improving but it is incredibly expensive. Even buying the right ticket is a minefield.
Conceptually, it was absurd to divide the network from the train companies that run on it; any rail system works as an integrated whole.
It was equally a conceptual disaster to imagine that because each train licence is of necessity a monopoly – you can't have two services from London to say Manchester competing against each other – the monopoly had to be temporary with renewable licences auctioned at 10-year intervals.
As a result, the holders are invited to be short-term value extractors rather than long-term value creators, hired hands to drive down costs paying high dividends to whatever tax haven.
What's more, it was crazed to believe a public good required minimal or no public grants. Lastly, it was asinine not to understand that private capital demands financial returns well above the cost of capital available to the low-risk state.
As a result, there have to be never-ending and ongoing efficiency gains beyond the initial round of layoffs and wage cuts to deliver those extra returns.
That cannot be done even by the hand of God.
The only recourse is poorer service provision, structuring activities through offshore tax havens to avoid tax and ever higher fares.
The bits of the system that work are those that have been redesigned to accept economic logic and the "publicness" of what is of necessity a public monopoly network.
The collapse of Railtrack in 2001 after the Hatfield disaster forced the creation of Network Rail, a not-for-dividend statutory corporation limited by guarantee, an elaborate organisational con to avoid the dread words "public company" and "nationalisation", even though it is 100% owned by the state.
The de facto state backing has allowed it to run up borrowing of £30bn to finance rail investment, but at higher rates of interest than if it had been openly acknowledged that it was publicly owned.
The cumulative extra servicing cost is more than £150m, but as the Office for National Statistics is now calling for the con to be ended and the debt reclassified as public debt, it's all for nothing.
Brilliant.
Directly Operated Railways is the 100% publicly owned company that took over the east coast mainline when the incompetent private operator walked away from its obligations in 2009.
Five years of public ownership and it is now the best run and most efficient operator, making a net surplus of £16m for the taxpayer.
Its reward? To be sold back to a private operator next February that will redirect the surplus through a tax haven as dividends, game the Department for Transport for higher government support and walk away if the financial returns are not good enough.
Thus the benefits of British-style private ownership in a public network.
Meanwhile, the absurdities of privatisation continue.
Two of the three companies that own the rolling stock leased to the train operating companies are owned in Jersey, the third is owned in Luxembourg. None shows any interest in supporting rolling stock manufacture in the country they so casually pillage.
The ultimate owner of Virgin trains are Branson's family trusts in the Virgin Islands. Operating in a tax haven allows him to move from business to business without massive tax liabilities. As he says: "If we had not done it the way that we did, Virgin would be half the size it is today".
His candour is refreshing.
Properly owned private companies are a force for good,
but they do not belong everywhere.
Networks of key public services such as rail
are natural monopolies; ownership in other countries respects that truth, and
Britain's attempt to escape it has been a costly debacle.
Great public
infrastructure is delivered through great public institutions or if though
private companies, those that are constituted by their founding charter to
deliver public benefits.
It's time to build and expand the public institutions
we have and insist that any private holder of a franchise designed to deliver a
public good is constituted as a public benefit company with a charter that sets
outs obligations to match the privileges, including paying UK tax.
It's time to
end the rip off.
Commuters of Britain unite! You've nothing to lose but your
overpriced season tickets.
A good sign.
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