Nationalisation: cost is not the only question that needs to be addressed

Dr Chris O’Leary is a specialist in public policy and is a senior lecturer in the Policy Evaluation and Research Unit.  Much of his work before joining PERU was around modelling need and demand in terms of multiple needs, prevention and integration of services. Chris also teaches on social policy and evidence-based policy within the Department of Sociology.

State ownership is back on the political agenda. After four decades in which the UK has led a world-wide movement away from state owned monopolies in utilities and major industries, the Labour Party is now committing itself to nationalisiing gas, electricity, water, the railways, Royal Mail, and potentially raft of other services that will be ‘brought back into public ownership’. So far, these plans remain largely unchallenged or debated. The Institute for Fiscal Studies and the Centre for Policy Studies have bother estimated the cost of nationalising the water industry at around £90b, but there has been little else in the way of questioning these proposals. Indeed, John McDonnell appears to have got away without any challenge or question with his claim that water nationalisation won’t cost a penny because it will be funded out of profits, a claim that simply doesn’t stack up as I discuss here. But there are other substantive questions, over and above costs, that need to be addressed in terms of these proposals. These questions – the creation of state monopolies, the return on investment that is expected from nationalisation, and the ignoring of history, are set out in detail here. First, though, I want to challenge the ‘cost neutral’ claim.

Nationalisation will be anything but ‘cost neutral’

It has claimed several times that nationalisation won’t cost the taxpayer a penny, because the government will use the profits that currently go to shareholders to pay for the costs of nationalisation. It’s an intriguing claim, and one that plays into the ‘fat cats’ narrative rather well – that government would take from the rich elites and use that money for public benefit.

The problem is, even though there is some evidence from research by Greenwich University that the water industry is making ‘excessive profits’, the total profits generated by the water industry are in the order of £20b over a ten year period. Even assuming government could borrow the £90b required to renationalise water at zero interest rates, it would still take decades before the profits actually covered the upfront costs of nationalisation. Of course, government could increase these profits by reversing the additional investment that privatisation has brought – according to the regulator, OfWat, this includes reducing leakages by around a third, bills being £120 lower than would otherwise have been the case, and the continued quality of our drinking water. But Labour has pledge to increase, not decrease, investment, and the initial investment won’t be at zero interest rates, and so it is likely that profit levels will fall and that the £90b cost will stay on the public debt for fifty or more years.

Of course the alternative route, and one favoured by many in the pro-nationalisation camp, is for government to simply appropriate, at below market or zero cost, in the ‘public interest’. There are two substantive problems with this plan. First, it is highly likely that such a move would land the government in court, not least because it would breach European Union law. But more importantly, such proposals completely ignore who actually owns the shares of these utility companies. Far from the fat cat billionaires of popular narrative, these companies are owned by ordinary working people, through their pension funds. Any nationalisation done at anything below market value will cost ordinary workers – teachers, bus drivers, supermarket workers, factory workers – dear in terms of lower or lost pensions.

So, there remain significant questions about the cost of these proposals, and how exactly these costs will be met. Because it looks like nationalisation will result in a massive increase in public debt, which would take decades to pay off. And such a plan will do nothing for inter-generational fairness, because it will be the children and young people of today who will be saddled with these debts and will paying them back (and the interest payments in the meantime).

Nationalisation will create state monopolies

Monopolies are bad. Decades of theoretical and empirical research, plus simple experience, tells us that monopolies are bad; they are exploited by the monopolist and are socially wasteful. Yet what is being proposed here is the creation of a whole bunch of new, state owned, monopolies, without even a murmur against these proposals. And it is unclear whether the current system of economic regulation – OfWat and OfGem with respect to water, gas and electricity – will be retained or whether there will be a return to the system that existed when these sectors were previously state owned, where any regulation was done directly by Parliament. Centralised, bureaucratic, monopolistic organisations are bad at a number of levels – they don’t innovate, they don’t invest, they become producer, not consumer, orientated. Far from working for the benefit of the public, these new state monopolies would be invariably used as political footballs, would under-invest (as many state owned organisations currently do, and have previously done), and would end any concept of competition and consumer choice.

The question here is then, why replace competition and consumer choice with state monopolies? How will these be regulated and controlled so they really do benefit ordinary people?

Nationalisation didn’t work before, and doesn’t work now

Those of us of a certain age will remember the halcyon days of the nationalised utilities. We remember waiting three months for a phone line to be connected (because BT was a monopoly and reduced its costs through rationing), and only having a choice of colour in terms of the phones we could have. We remember gas and electricity costing taxpayers in subsidies, not delivering profits for taxpayers. We remember terrible customer service, no choice or ability to switch provider. And for existing public services, where the state has a monopoly or near monopoly, we currently see poor customer service and under-investment. Because monopolists, particularly those whose monopolies are secured in perpetuity  by the state, have no incentive to improve customer services and politicians have every incentive to underinvest to keep down prices. So the question here is simple – why would nationalisation be different this time? How will government ensure that underinvestment and poor customer service won’t also return? What will be different, and how will this difference be delivered?

Return on investment?

So, nationalisation is likely to cost billions in upfront costs, which will sit on the public debt for decades to come. It will create a raft of new state monopolies, and monopolies are generally bad for consumers. There is nothing in the plans being put forward that suggests that the lessons of history have been learnt, and that renationalised utilities will be anything but the under-invested political footballs and poor consumer relations organisations that they were when previously nationalised. Given all of this, is there some other return on investment – some increase in productivity – that would likely justify the huge cost to taxpayers arising from these nationalisation plans.

The simply answer is no. There is nothing in these proposals that suggests any productivity gains, and certainly no gains that would offset the cost of nationalisation. The cost of nationalisation isn’t an extra investment, isn’t extra money being invested in infrastructure or staff, and isn’t likely to have any effect on productivity. Even if a future government stumps up extra cash to invest in these renationalised utilities, all of the evidence from previous such investment suggests a diminishing marginal rate of return. That is, the more money invested, the less we get from that investment. So the question then becomes, what benefit will these nationalisations actually deliver to taxpayers and consumers?

Conclusion

Sure, there is rightly a debate about the quality of customer service, the level of profits, and the size and cost of investment in our utilities and utility infrastructure. But the creation of a series of new state owned monopolies, as being proposed through the nationalisation of water, gas, electricity, Royal Mail and the railways, is unlikely to resolve these issues. What it will do is land a huge new public debt, to be serviced and paid off by today’s children and young people, without any clear idea of the return on this investment or how state ownership will actually improve things. While nationalisation might be populist and may carry ideological favour with a small number of people, it is incapable of producing any real benefits for ordinary working people.

Dr Chris O’Leary

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