Economic Theory

Why privatisation always trumps nationalisation

In a recent poll, there was strong support for the renationalisation of both the railways and the energy industry. In both cases, renationalisation would be a strange step back into the dark ages of state controlled industrial strategy. As it happens, ownership of the railway infrastructure is already nationalised although the trains are operated privately. It is the problems caused by the nationalised part of the industry about which the most complaints are made.

When we are sitting on a train complaining about delays, that delay is normally caused by the nationalised infrastructure company and not by the private company operating the trains. When we complain about the costs of the railways and the level of government subsidies, the nationalised network is responsible for those high costs to a much greater extent than the private operating companies. Nationalisation cannot be the solution to the problems evident within a nationalised industry.

Indeed, the private part of the train network – the operating companies – are doing spectacularly well by all measures whether it is passenger traffic, investment in rolling stock or the marketing of special cheap rail deals attractive to different types of customers. There is a good news story here. Passenger traffic is back at levels not seen since the 1920s, having increased by 88 per cent since privatisation.

Any students wishing to travel home to Manchester for Christmas can book a lunchtime train from London with Virgin for just £30 in mid-December. This would be a first class ticket with free meals, drinks and Wi-Fi; something I could have only dreamed about as a student. So, let us not go back to the dark days of nationalisation. Indeed, it would be much better to allow the industry to merge the track with the trains under private ownership to avoid the unnecessary costs imposed by the artificial split.

The situation in the energy market is similar. Privatisation was an unalloyed success with prices falling by over 30 per cent in the following decade or so. What has happened since is a form of corporatist state control of private businesses as regulations and costs have been loaded onto the energy companies – and investment plans dictated by the state. The government has locked in a nuclear power deal that involves guaranteeing twice the current market price for electricity. The state also requires companies to source energy from renewables costing up to three-and-a-half times the cost of producing electricity through the cheapest method.

It is true that, today, after a decade or more of increasing state control, we have an energy industry that serves vested interests rather than the consumer interest once again. Electricity prices before taxes are now 15 per cent higher than the average of major developed nations. Electricity could be around 50 per cent cheaper without the government’s interventions. We must liberalise that industry and not return to the state control that is the source of most of the industry’s problems.

We should, perhaps, remember one fact from the era of nationalisation. In the post-war period, government planning dictated the development of a nuclear programme using expensive technologies promoted by the government of the day. This led to the most expensive government project disaster in British history, costing well over £30bn.

Perhaps the nationalised High Speed 2 rail service will beat that record. We may have grumbles from day-to-day but it is far better to have private businesses that are responsible to consumers and shareholders rather than nationalised industries that answer to bureaucrats and vested interests. The record demonstrates that. If anything, the experience in both the rail and energy industries suggests that the government needs to intervene less and not more.

This article was originally published by Policy Review.


Academic and Research Director, IEA

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

12 thoughts on “Why privatisation always trumps nationalisation”

  1. Posted 13/11/2013 at 22:07 | Permalink

    Philip – I have many times pointed out to people who complain about the privatised rail industry that in fact the network was long since re-nationalised, that the subsidy goes overwhelmingly to the network operator and that this only increased (hugely, by the way) after re-nationalisation. The other thing that isn’t pointed out to those supporting re-nationalisation is that it would require them to pay higher taxes to buy back the industries concerned…

    Coincidentally, I was just online a few minutes ago looking to book my daughter’s rail tickets back from Glasgow University for Christmas. £91 return (not first class!) via London. Not too bad (albeit coach services are half the price although slower).

  2. Posted 13/11/2013 at 23:54 | Permalink


    You say that electricity prices fell dramatically following privatisation but are now 15% above developed-country average before tax. Is there a possibility that what has happened in electricity echoes what has happened in water, where private equity has loaded debt onto the companies so as to pay super-normal dividends, and been allowed by the regulator to pass the costs of that debt on in higher charges.

    Regarding the £30 bn cost for the first (two?) wave(s) of nuclear, is that in 2013 pounds?

  3. Posted 14/11/2013 at 13:06 | Permalink

    thanks, HJ, good points.

    Tom – I doubt it, there are certainly different types of ownership and business models in energy whereas we all face monopolies in water. However, the regluator should (I don’t know whether they do) take into account only the cost of risk capital in the business when regulating water charges and not the cost of the particular financial structure that happens to have been adopted. Also, consumer prices in energy are surely not regulated.

  4. Posted 14/11/2013 at 14:46 | Permalink

    Thanks Philip.

    I think the distinction between water and electricity regulation is that the electricity regulator focuses primarily on competition, whereas the water regulator regulates prices. That may make the practice I described impossible in electricity. As for water, I think it depends how the regulator does their job, and I suspect that while Sir Ian Byatt did the job well, the same cannot be said for others. The new head of Ofwat may be more in Sir Ian’s camp, however. We can only hope!

  5. Posted 14/11/2013 at 16:02 | Permalink

    agree, Tom

  6. Posted 19/03/2015 at 04:05 | Permalink

    What was the reason for the re-nationalisation of the actual railway lines? Clearly privatisation was tried, why was it changed back?

    I lived in Manchester recently for around 5 months and I’m not convinced that privatising the rolling stock has really resulted in a good train system. Train fares were gag-worthy expensive, the rolling stock was really old in many cases and the different rules stipulated by each individual train company regarding storing bikes on the trains was hugely inconvenient.

    As for blaming delays on the railway lines – whenever I looked into the cause of an unexpected delay the problem was usually wet leaves on the tracks, track flooding and the occasional suicide. None of these strike me as being the result of who runs the railway tracks.

  7. Posted 19/03/2015 at 12:44 | Permalink

    Melanie – it happened as a result of a well-publicised (and hotly disputed) series of events under Stephen Byers. I think that both sides had a reasonable argument to make about that dispute but its escalation (rather than the dispute itself) led Byers feeling as if he had no option but to (in effect) renationalise.

    In fact, it may be very good for passengers if different companies with different carry loads and so on have different rules with regard to bikes (it happens on my train lines too and the distinctions seem quite reasonable – basically, you cannot take non-folding bikes on trains running on routes which are likely to be very crowded). The points you note about delays are all track issues. Whether anything can be done about them (at reasonable cost) is a moot point. But, wet leaves is a very good example of something where integration of track and train might be helpful.

    I shall be coming to Manchester soon on a fare which I regard as incredibly low. It is available because of the way in which privatisation gave incentives to companies to maximise traffic (you could argue – quite validly – without giving incentives to the track providers to expand capacity). Nevertheless, these great deals are available because of the improved marketing following privatisation. It is difficult to describe how bad services were in the 1980s.

  8. Posted 19/03/2015 at 12:50 | Permalink

    @Melanie – look at who the rail regulator fines most for delays. It’s Network Rail. As for re-nationalisation, it was done for political reasons. Railtrack asked for a higher subsidy to make safety recommendations required by the rail regulator. Byers refused, thus sending Railtrack into bankruptcy. He then set up Network Rail and gave them much higher subsidies than Railtrack ever received or even asked for.

  9. Posted 19/03/2015 at 21:33 | Permalink

    Re the different bike carrying rules – the routes were the same, the difference was simply the train company. The rules were different because they were two different companies – it’s that simple.

    ‘It was political’ is not a convincing argument for why the tracks were renationalized. Politics is part of everything, including the huge push to privatize everything. I’ve read books on the British railways (I’m an engineer, I’m interested in technology) and my impression is that Railtrack messed up.

    Your assertion that privatization ‘always’ trumps nationalization strikes me as ridiculous. You’re saying that there are no exceptions to this rule, ever?

    If this is really what you believe, you need a stronger piece. The above article isn’t convincing. I’d like references and more detailed examples. Also, since you’ve said ‘always’, id love to hear your thoughts on a privatized judicial system.

  10. Posted 20/03/2015 at 13:27 | Permalink

    I think it is fairly clear that I am talking about industries that produce things using large scale infrastructure (which, of course, were founded in the private sector). But, there is in the case of commercial law, a long and great history of private, competing commercial courts. Indeed, one of the reasons why we are such a large exporter of legal services today is because of that inheritance and the desire of so many commercial contracting party to write their contracts under English commercial law. Of course, state courts will often be used to adjudicate on such contracts but there are many forms of private dispute resolution too. I can write 800 word blog posts and I can write journal articles and I think you have to judge the former by the standards of the former rather than expect them to be effectively PhD theses. The Official History of Privatisation by David Parker gives a good academic review – and very balanced. He was commissioned by a Labour government (the same one that renationalised railtrack). The political nature of that decision is illustrated by the fact that it was taken on 9/11 with it being argued that it was a good day to bury bad news.

  11. Posted 08/06/2015 at 14:20 | Permalink

    The title made me laugh. No, privatisation doesn’t trump nationalisation. Why, do you ask? For the simple answer that private companies are always about making a profit for their shareholders and disregarding the customer. I point you to the privatised parts of the NHS, G4S, ATOS, bus companies such as Arriva etc.

  12. Posted 08/06/2015 at 18:40 | Permalink

    @Anonymous – Are you serious? You think that monopoly public sector organisations funded by taxes are more responsive to their customers? Really? And what incentive do they have to be so? Even in the case of a monopoly (and let’s remember that most monopolies can only be maintained by the public sector, as they have a call on tax funding), a regulator can punish shareholders with fines. How can a regulator punish a public sector organisation? As for G4S, you will remember that it was a public sector cock-up at the Olympics because they grossly under-estimated the number of staff required and asked G4S to recruit many more at a very late stage. G4S made the mistake of agreeing – and when they failed, they paid compensation. Would a public sector organisation have paid compensation?

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