The founding fallacies of privatisation

In reference to my last post, it is perhaps important to counter what I call, the founding myths of privatisation. I would highlight three in particular.

Private v’s public
The first fallacy is that its cheaper to run things via a private sector firm than in the public sector.

Now, as someone who works in the public sector I am all too aware of a certain number of my co-workers, many of them in senior positions (drawing on a considerable salary) who quite frankly, are more obstacles to the efficient running of the university. If Osborne happened to drop by and ask for a way the uni could save money, I suspect many of us staff would point to the key offenders and say “sack him/her” and not only would it save the taxpayer money, but productivity in the university would actually increase! But equally, during my term in private industry, I’ve seen many clueless and inept bosses whose job function seemed to be to stop the rest of us doing our jobs.

Indeed data does seem to suggest that the publicly run NHS provides much better value for money than the privatised US health care system. Now I’m not suggesting that the NHS is a model of efficiency, I’m merely pointing out that there nothing to say that just because a company is run by the private sector (with a profit motive) does not automatically make it cheaper and more efficient. And in a similar vein, as I discuss here, despite heavy government subsidy, the UK’s train services are actually more expensive that similar services provided by public sector companies in other countries.

Of course part of the problem for a private firm is that they are after all running a business, not a public service. The company and its shareholders are in it for the money, and surprise, surprise, they are going to place lining their pockets with sliver and awarding themselves large bonuses ahead of, say fixing all those leaky water pipes or providing more spacious trains for commuters.

Competition is key
The second fallacy is that governments often forget that one of the key variables in private industry, is that of competition. Bosses need to feel their competitors breathing down their neck before they step up to the plate. Otherwise, any time the unions threaten a strike over Christmas, they’ll just roll over and give in (this is how we end up with train drivers earning more than airline pilots!). Or if a supplier or maintenance contractor starts charging a king’s ransom, the boss just shakes his head and signs the cheque (rather than go to the trouble of replacing his hardware and finding a new supplier/contractor). The financial incentive to spend the cash replace antiquated systems that cost alot to maintain (such as signalling on the train lines), just isn’t there.

One of the big problems with the “privatised” railways or water companies is that most of their “customers”….that would be us poor saps, don’t really have any choice but to use their services. I mean if you live far from work and can’t get their by car (possibly because you can’t afford one), then you really have no choice but to either use the train or quit you’re job. And incidentally the latest rise in rail fares is prompting some people to do just this, as the cost of rail travel is for them exceeding the benefits of working.

Similarly, I can’t exactly ring my water company, tell them to shove off, and start relying on bottled stuff!

Now government’s often tries to claim that they compensate for this lack of outright competition by making companies bid for contracts. But I would point to the fiasco of the West Coast contract as an example of how divorced from reality this claim is.

I am no fan of Virgin trains (if there’s one thing I associate with their trains its the smell of piss from those overly large toilets of theirs), but clearly First Group we’re simply pulling numbers out of a hat to get the contract. Once they had it and inevitably failed to deliver, there would be sweet FA the government could do about. And again, while I’d agree Virgin have been doing a pretty crap job on the railways (maybe not any worse than any other UK train company), but I fail to see how changing the logo on the side of the train is going to change anything.

Further a large chuck of the problems within the Railway companies can be traced back to the privatisation process. As the companies had to bid against each other to get the contracts, many started operation with huge debts (most borrowed the money to pay the government for the contract against their rail companies assets). This made it very difficult for them to raise the capital to spend serious amounts of cash on new trains or infrastructure without some form of government support.

And again, in reference to the probation service privatisation I just posted about, its worth noting that companies like G4S, who have previously screwed up royally and cost the taxpayer millions, are in the bidding for these contracts.

If you tendered several builders for an extension to you’re house and the one who got the job made a mess, went way over budget and then buggered off leaving you with a hole in the roof, I’m guessing you won’t hire him again to fix up the garage (I suspect if you contacted him again, it would be to set up a sting and get him on one of those “rogue traders” TV shows!). But that’s exactly what the government does with these companies time and time again. Every time a contact goes out for, say, a new class of Submarine, the same guys who went over budget and buggered up the previous time, still end up getting the contract!

Too big to fail
Finally there is the problem that many of these privatised public services essentially fall into the category of being “too big to fail”. As I’ve mentioned before, if any government ever did bite the bullet and try to create a “real” privatised train service with open competition between companies on lines and companies like Ryanair free to buy slots and run their own trains, bring in lower paid staff from abroad and an open bidding system for railway service contracts.

Inevitably under such a system there would be winners and losers. And the losers would involve train companies going to the wall leaving passengers stranded and some stations (in marginal constituencies) without any active trains. With many people unable to get to work, the economic consequences for the country would be devastating. And of course the political consequences would be even worse come the next election. This is why we see the absurdity of the government paying 5 times more to subsidize a privatised railway system as under the last days of British Rail.

Similarly the government cannot afford to let its virtually privatized network of universities go to the wall, due to the awful political and economic consequences that would unfold. The water and power generating companies also know that they can behave as badly as they like and never go broke. As cometh the hour, they will be rescued by the state. As there’s no better way to loose an election than to cut off people’s water (which almost happened due to the drought) or electricity.

Don’t get me wrong, there are many things that private companies do and do well, and do very efficiently. But there are sound economic reasons why capitalism works and in many cases privatisation amounts to one ignoring these rules.

And there are some public services which we don’t want to end up in the private sector. The cost to society in the disruption of these services, being simply too great for any nation to risk.


6 thoughts on “The founding fallacies of privatisation

  1. The usual reason people in the public sector think they do things cheaper is because they don’t ever work out the real costs of anything. There are some things best done by the the public sector, I agree, but mostly they are things that make no economic sense, like waging war.


    • And I would respond that supporters of privatisation often also fail to consider the value of public services and the cost of them being badly run.

      Poor public transport it means many people who can’t get to work and end up claiming benefits (rather than paying taxes). Also higher train fares pushes people onto the roads, which cost the government a considerable amount of money to maintain.

      Better health care means workers earning and paying taxes for longer and retiring later.


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