A renationalisation agenda would be disastrous for consumers
12 August 2015
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Labour leadership contender Jeremy Corbyn has called for a “public debate” about renationalisation, in particular of the railways but even of energy firms. As with others occupying the left wing of UK politics, his logic seems to be: “these industries were privatised, prices have gone up in these industries, ergo privatisation has caused high prices and bad outcomes for consumers”. Worryingly, this delusional analysis is apparently popular. Polling carried out for the CLASS think tank shows that the public overwhelmingly support renationalisation of the energy sector, by 68 per cent to 21 per cent.
Corbyn’s own burgeoning popularity means that those who recognise the folly here need to stand up and state clearly: renationalisation would be a disaster for consumers and for the public finances. Plus, it would do nothing to address consumers’ real concerns.
Take the railways. For a start, most indicators, including passenger numbers, suggest public disdain for this notionally privatised industry may not be as great as Corbyn suggests. Any renationalisation would also come at significant public cost – because of the need to buy the assets and fund the industry’s day-to-day running (not to mention the longer-term effects of less competition).
Putting this aside, there is still no evidence that eliminating the profit motive would enable lower prices for consumers. Train operating companies have relatively modest profit margins – estimated to be just 3 per cent. So even if you subscribe to the wrong-headed opinion that profit is extortion, rather than what it is – a return – the ‘savings’ from no longer paying out dividends to shareholders would not be large enough to fund a significant reduction in fares. Renationalisation would therefore likely come with more state subsidy to lower fares – something that would be highly regressive: almost 60 per cent of spending on rail fares is currently undertaken by the richest 20 per cent of households.
The geography of the railways and politically-motivated investment in expensive and uneconomic new infrastructure are far more important in explaining structurally high UK rail fares than “privatisation”. All renationalisation would do is risk the little innovation we do see in the current framework.
A similar story can be seen in energy. Corbyn says he is “looking at the whole question of the energy industry, the excessive profit-taking of the ‘big six’”. But claiming renationalisation will be good for consumers is ignorant of our own history.
Prior to liberalisation and privatisation, vested producer interests in the coal industry ensured that consumers were unable to benefit from the substitution of expensive coal for cheap natural gas. Later, state planning dictated a nuclear programme that is probably one of the most expensive government project disasters in history. It was only the liberalisation and privatisation of the sector that enabled lower prices. Between 1990 and 2004, following the privatisation process, the average annual gas bill fell by 16 per cent and the average annual electricity bill fell by 25 per cent.
Now it’s certainly true, and well documented, that prices since then have risen significantly. This has mainly been driven by rising international wholesale prices. But this period has also seen a huge increase in state control and regulation of the sector – not least through the green agenda and regulations on tariffs (which the recent Competition and Markets Authority report recommended overturning).
In both the rail and energy sectors, the industry structures and regulatory frameworks could be significantly improved to facilitate more innovation and lower costs. But it’s unclear what renationalisation would achieve – other than even less entrepreneurial activity in these sectors, and the return of powerful vested interests holding consumers to ransom.
Ryan Bourne is the IEA’s Head of Public Policy, and a joint author of the IEA Briefing ‘Smoking out red herrings’, which deals in greater depth with some of the popular misconceptions raised here. This article first appeared in City AM.
Corbyn’s own burgeoning popularity means that those who recognise the folly here need to stand up and state clearly: renationalisation would be a disaster for consumers and for the public finances. Plus, it would do nothing to address consumers’ real concerns.
Take the railways. For a start, most indicators, including passenger numbers, suggest public disdain for this notionally privatised industry may not be as great as Corbyn suggests. Any renationalisation would also come at significant public cost – because of the need to buy the assets and fund the industry’s day-to-day running (not to mention the longer-term effects of less competition).
Putting this aside, there is still no evidence that eliminating the profit motive would enable lower prices for consumers. Train operating companies have relatively modest profit margins – estimated to be just 3 per cent. So even if you subscribe to the wrong-headed opinion that profit is extortion, rather than what it is – a return – the ‘savings’ from no longer paying out dividends to shareholders would not be large enough to fund a significant reduction in fares. Renationalisation would therefore likely come with more state subsidy to lower fares – something that would be highly regressive: almost 60 per cent of spending on rail fares is currently undertaken by the richest 20 per cent of households.
The geography of the railways and politically-motivated investment in expensive and uneconomic new infrastructure are far more important in explaining structurally high UK rail fares than “privatisation”. All renationalisation would do is risk the little innovation we do see in the current framework.
A similar story can be seen in energy. Corbyn says he is “looking at the whole question of the energy industry, the excessive profit-taking of the ‘big six’”. But claiming renationalisation will be good for consumers is ignorant of our own history.
Prior to liberalisation and privatisation, vested producer interests in the coal industry ensured that consumers were unable to benefit from the substitution of expensive coal for cheap natural gas. Later, state planning dictated a nuclear programme that is probably one of the most expensive government project disasters in history. It was only the liberalisation and privatisation of the sector that enabled lower prices. Between 1990 and 2004, following the privatisation process, the average annual gas bill fell by 16 per cent and the average annual electricity bill fell by 25 per cent.
Now it’s certainly true, and well documented, that prices since then have risen significantly. This has mainly been driven by rising international wholesale prices. But this period has also seen a huge increase in state control and regulation of the sector – not least through the green agenda and regulations on tariffs (which the recent Competition and Markets Authority report recommended overturning).
In both the rail and energy sectors, the industry structures and regulatory frameworks could be significantly improved to facilitate more innovation and lower costs. But it’s unclear what renationalisation would achieve – other than even less entrepreneurial activity in these sectors, and the return of powerful vested interests holding consumers to ransom.
Ryan Bourne is the IEA’s Head of Public Policy, and a joint author of the IEA Briefing ‘Smoking out red herrings’, which deals in greater depth with some of the popular misconceptions raised here. This article first appeared in City AM.
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Those polls which indicate that people want re-nationalisation of the railways and energy sector amuse me. The question they ask is akin to asking “Do you want a new car”? Most people would naturally say “Yes” (thinking free lunch).
But were the more analogous question “Would you like me to buy a new car for you using your money (or borrowing money on your behalf on which you’d have to pay interest)” asked, the answer might be rather different.
Interesting that no mention is made that prior to privatisation the taxpayer subsidised the UK’s rail system at £2.8bn per annum but now it is over £4bn.
@Anonymous – Your comparison is fallacious since the rail network was effectively renationalised (in the form of Network Rail) in 2002 – the subsidy only increased (and it increased hugely) following this renationlisation. That’s where the increased subsidy goes, not to the private train operators.
Some train operators do get a subsidy, and without the infrastructure being subsidised the operators wouldn’t have anything to run their trains on. The two things cannot be seperated, and all in all the UK’s railway system now gets more support from taxpayers than it did when it was British Rail. And let us not forget that it isn’t only about money and consider how the UK’s train network nearly collapsed when it was totally run by the private sector pre 2002.
@Anonymous – Train operators only get a subsidy where the government wants them to run trains for social reasons that are otherwise economically unviable. On the whole, they receive no subsidy. You also need to look at what happened to the subsidy when Network Rail was created by re-nationalising the network – it immediately rose by billions, whereas it had been below the level BR received when it was in private hands.
Railways, like utilities are natural monopolies. Natural monopolies can never achieve economic efficiency under a privatised format to effect market efficiency and price competition because of the nature of a monopoly.
The best we have seen is a series of inefficient oligopolies, that even hen fined for poor delivery, eventually pass these costs onto the public.
Additionally, studies comparing privatisation against nationalisation in the UK, do not take into account the cost and the effectiveness of the regulating quangos. For example, if post privatisation electricity is to be compared, it needs to amalgamate the returns from and costs of the Grid, the supply companies, the installation companies and the infrastructure. In other words all that comprised the nationalised industry have to be brought together.
The nationalised industries of the past suffered poor management from civil servants who had virtually life-time job protection, a non-commercial accounting system such as that of local government and no take-up of economies of scale.
If re-nationalised natural monopolies had professional and proven managers, a proper informative and timely delivering management information framework, took advantage of economies of scale and worked on cost minimisation subject to delivering properly thought out and clearly communicated targets, they would be performing better than both the old nationalisation and the currently existing privatised entities. The latter will present a problem to politicians who will need to have sufficient background to be able to understand their advisers and advisers who have adequate microeconomic vision and ability.
Unfortunately, at the moment, the Corbyn team is yet to have this. However, things may change.