Kingfisher and India's Crony Capitalism

Ask a small businessman what it’d mean to default on depositing provident fund dues, or to not deposit tax deducted at source, or to default on interest payments on a bank loan. For the first two offences, you can be fined heavily and imprisoned. For the third, you can lose control, first of the business, and then of your personal assets. And yet, nobody expects any of these things to happen to flamboyant liquor baron Vijay Mallya, even though his Kingfisher Airlines is in a similar situation.
Mallya is not only expecting more money from banks to fund his eternally cash-guzzling business, but also a policy change that will help him get a partner with deep pockets. No, of course, that would not mean giving up control—no matter that accumulated losses at Kingfisher by the end of this year would be Rs 7,000 crore. He is a big businessman, he is a Rajya Sabha member, he plays hard. He cannot lose. That’s capitalism, Indian style.

About a decade ago, Raghuram Rajan wrote the path-breaking Saving Capitalism From the Capitalists. The book’s theme was simple: what we label as capitalism is often a distorted version; the true spirit of capitalism is undermined by capitalists themselves—by getting an unfair advantage, as in crony capitalism. India’s airline business is a great example. Interestingly, Rajan is quite comfortable being an advisor to PM Manmohan Singh, whose government has set new standards for crony capitalism. (Rajan prefers to rail against India’s education system, but that’s another story.)
As part of a perverse policy followed by successive governments, Indian private sector entrepreneurs with no experience in the airline business were licensed. This led to the quick entry and exit of many players (some with questionable reputations) like East West Airlines, ModiLuft, Damania Airways, Air Deccan, Air Sahara, Paramount, among others. This was not normal business mortality. While the Indian air carriers were experimenting with business models, the “open skies” policy remained closed to deep-pocketed foreign investors who had real expertise in running airlines unlike chicken kings, liquor lords and sundry egomaniacs.

This policy of admitting the undeserving, while keeping out the deserving, has created a sick industry and harassment for Indian air travellers. Indeed, Kingfisher was not only allowed entry, it could also easily lean on government-owned financial institutions to fund a business that never had any real hope of making money. Later, when the loans turned bad, it could get part of the bank loans converted to equity.

As part of the same kind of capitalism, the aviation ministry wreaked havoc on the national carrier, Air India. Canadian research firm Veritas calls the civil aviation ministry’s attitude to Air India “duplicitous” and observes, “It could be on the diktat of the regulatory authorities involving various ministries of the Government of India that an unviable airline, Kingfisher, which is competing against the incumbent state carrier and siphoning away its passengers on both the domestic and international routes, is being supported via taxpayer-funded financial institutions.” Entry for dubious parties, barring foreign investors who have run airlines, suffocating the state-owned carrier, getting state-owned banks to lend, getting the banks to convert debt to equity—this is copybook crony capitalism.

Since Manmohan Singh’s government will do nothing, redress may come by other, natural means. About three years ago, I was chatting with a foreign institutional investor who has put quite a bit of money into United Breweries. He asked me what I thought of UB. The “story” was great: Indians were getting prosperous and drinking more beer, per capita consumption was low and UB was the biggest player. How could you go wrong? Having seen Indian businessmen from close quarters for 28 years now, I told him UB will go bankrupt before making him rich because that would be Mallya’s only source of funds for the eternally loss-making Kingfisher. He smiled and said: “We are betting on that.”

Mallya had already given up a part of the UB’s spirits and beer business to foreign partners and was running down the rest of the value by using it to fuel his flying adventure. Competitors like Kishore Chhabria and Mallya’s own partners and investors have been biding their time. Has the time come for the tale to play out rapidly to its obvious conclusion, now that respected activists like Aruna Roy or Nikhil Dey have voiced their well-reasoned protest? Or will capitalism continue to be undermined by capitalists, netas and babus?

by Debasis Basu in Outlook India

No Walmart, Please

By Justice Rajindar Sachar (retd)

17 December, 2011
The Tribune, India

Govt’s claim is questionable

If the combined Opposition had sat down for weeks to find an issue to embarrass the UPA government and make it a laughing stock before the whole country, they could not have thought of a better issue than the free gift presented to it initially by the government by insisting that it had decided irrevocably to allow the entry of multi-brand retail super stores like Walmart and then within a few days, with a whimper, withdrawing the proposal.

As it is, even initially this decision defied logic in view of the Punjab and UP elections and known strong views against it of the BJP and the Left. Many states had all the time opposed the entry of Walmart which would affect the lives of millions in the country.

Retail business in India is estimated to be of the order of $ 400 billion, but the share of the corporate sector is only 5 per cent. There are 50 million retailers in India, including hawkers and pavement sellers. This comes to one retailer serving eight Indians. In China, it is one for 100 Chinese. Food is 63 per cent of the retail trade, according to information given by FICCI.

The claim by the government that Walmart intrusion will not result in the closure of small retailers is a deliberate mis-statement. A study done by IOWA State University, US, has shown that in the first decade after Walmart arrived in IOWA the state lost 555 grocery stores, 298 hardware stores, 293 building supply stores, 161 variety stores, 158 women apparels stores and 153 shoe stores, 116 drug stores and 111 men and boys apparels stores. Why would it be different in India with a lesser capacity for resilience by small traders.

The fact is that during 15 years of Walmart entering the market, 31 super market chains sought bankruptcy. Of the 1.6 million employees of Walmart, only 1.2 per cent make a living above the poverty level. The Bureau of Labour Statistics, US, is on record with its conclusion that Walmart’s prices are not lower.

In Thailand, supermarkets led to a 14 per cent reduction in the share of ‘mom and pop’ stores within four years of FDI permission. In India, 33-60 per cent of the traditional fruit and vegetable retailers reported a 15-30 per cent decline in footfalls, a 10-30 per cent fall in sales and a 20-30 per cent decline in incomes across Bangalore, Ahmedabad and Chandigarh, the largest impact being in Bangalore, which is one of the most supermarket-penetrated cities in India.

The average size of the Walmart stores in the US is about 10,800 sq feet employing only 225 people. In that view, is not the government’s claim of an increase in employment unbelievable? The government’s attempt is to soften the blow by emphasising that Walmart is being allowed only 51 per cent in investment up to $100 million. Prima facie, the argument may seem attractive. But is the Walmart management so stupid that when its present turnover of retail is $ 400 billion it would settle for such a small gain? No, obviously, Walmart is proceeding on the maxim of the camel being allowed to put its head inside a tent and the occupant finding thereafter that he is being driven out of it by the camel occupying the whole of the tent space. One may substitute Walmart for the camel to understand the danger to our millions of retailers.

The tongue-in-cheek argument by the government that allowing Walmart to set up its business in India would lead to a fall in prices and an increase in employment is unproven. A 2004 report of a committee of the US House of Representatives concluded that “Walmart’s success has meant downward pressures on wages and benefits, rampant violations of basic workers’ rights and threats to the standard of living in communities across the country.” By what logic does the government say that in India the effect will be the opposite? The only explanation could be that it is a deliberate mis-statement to help multinationals.

Similar anti-consumer effects have happened by the working of another supermarket enterprise, Tesco of Britain.

A study carried out by Sunday Times shows that Tesco has almost total control of the food market of 108 of Britain’s coastal areas — 7.4 per cent of the country. The super stores like Walmart and Tesco have a compulsion to move out of England and the US because their markets are saturated. These companies are looking for countries with a larger population and low supermarket presence, according to David Hogues, Professor of Agri-Business at the Centre for Food Chain Research at Imperial College, London. They have got nowhere else to go and their home markets are already full. Similarly, a professor of Michigan State University has pointed out that retail revolution causes serious risks for developing country farmers who traditionally supply to the local street market.

In Thailand, Tesco controls more than half the Thai market. Though Tesco, when it moved into Thailand, promised to employ local people but it is openly being accused of indulging in unfair trading practices. The claim that these supermarket dealers will buy local products is belied because in a case filed against Tesco in July 2002 the court found it charging slotting fees to carry manufacturers’ products, charging entry fee of suppliers. In Bangkok, grocery stores’ sales declined by more than half since Tesco opened a store only four years ago.

In Malaysia, seeing the damage done by Tesco since January 2004, a freeze on the building of any new supermarket was imposed in three major cities and this when Tesco had only gone to Malaysia in 2002.

It is worth noting that 92 per cent of everything Walmart sells comes from Chinese-owned companies. The Indian market is already flooded with Chinese goods which are capturing the market with cheap offers, and traders are already crying foul because of the deplorable labour practices adopted by China. Can, in all fairness, the Indian government still persist in keeping the retail market open to foreign enterprises and thus endangering the earnings and occupations of millions of our countrymen and women?

The writer is a former Chief Justice of the High Court of Delhi

The 1% are the very best destroyers of wealth the world has ever seen

Our common treasury in the last 30 years has been captured by industrial psychopaths. That's why we're nearly bankrupt

• 
• • George Monbiot
  • guardian.co.uk, Monday 7 November 2011 20.30 GMT
  • larger | smaller

Illustration by Daniel Pudles

If wealth was the inevitable result of hard work and enterprise, every woman in Africa would be a millionaire. The claims that the ultra-rich 1% make for themselves – that they are possessed of unique intelligence or creativity or drive – are examples of the self-attribution fallacy. This means crediting yourself with outcomes for which you weren't responsible. Many of those who are rich today got there because they were able to capture certain jobs. This capture owes less to talent and intelligence than to a combination of the ruthless exploitation of others and accidents of birth, as such jobs are taken disproportionately by people born in certain places and into certain classes.

The findings of the psychologist Daniel Kahneman, winner of a Nobel economics prize, are devastating to the beliefs that financial high-fliers entertain about themselves. He discovered that their apparent success is a cognitive illusion. For example, he studied the results achieved by 25 wealth advisers across eight years. He found that the consistency of their performance was zero. "The results resembled what you would expect from a dice-rolling contest, not a game of skill." Those who received the biggest bonuses had simply got lucky.

Such results have been widely replicated. They show that traders and fund managers throughout Wall Street receive their massive remuneration for doing no better than would a chimpanzee flipping a coin. When Kahneman tried to point this out, they blanked him. "The illusion of skill … is deeply ingrained in their culture."

So much for the financial sector and its super-educated analysts. As for other kinds of business, you tell me. Is your boss possessed of judgment, vision and management skills superior to those of anyone else in the firm, or did he or she get there through bluff, bullshit and bullying?

In a study published by the journal Psychology, Crime and Law, Belinda Board and Katarina Fritzon tested 39 senior managers and chief executives from leading British businesses. They compared the results to the same tests on patients at Broadmoor special hospital, where people who have been convicted of serious crimes are incarcerated. On certain indicators of psychopathy, the bosses's scores either matched or exceeded those of the patients. In fact, on these criteria, they beat even the subset of patients who had been diagnosed with psychopathic personality disorders.

The psychopathic traits on which the bosses scored so highly, Board and Fritzon point out, closely resemble the characteristics that companies look for. Those who have these traits often possess great skill in flattering and manipulating powerful people. Egocentricity, a strong sense of entitlement, a readiness to exploit others and a lack of empathy and conscience are also unlikely to damage their prospects in many corporations.

In their book Snakes in Suits, Paul Babiak and Robert Hare point out that as the old corporate bureaucracies have been replaced by flexible, ever-changing structures, and as team players are deemed less valuable than competitive risk-takers, psychopathic traits are more likely to be selected and rewarded. Reading their work, it seems to me that if you have psychopathic tendencies and are born to a poor family, you're likely to go to prison. If you have psychopathic tendencies and are born to a rich family, you're likely to go to business school.

This is not to suggest that all executives are psychopaths. It is to suggest that the economy has been rewarding the wrong skills. As the bosses have shaken off the trade unions and captured both regulators and tax authorities, the distinction between the productive and rentier upper classes has broken down. Chief executives now behave like dukes, extracting from their financial estates sums out of all proportion to the work they do or the value they generate, sums that sometimes exhaust the businesses they parasitise. They are no more deserving of the share of wealth they've captured than oil sheikhs.

The rest of us are invited, by governments and by fawning interviews in the press, to subscribe to their myth of election: the belief that they are possessed of superhuman talents. The very rich are often described as wealth creators. But they have preyed on the earth's natural wealth and their workers' labour and creativity, impoverishing both people and planet. Now they have almost bankrupted us. The wealth creators of neoliberal mythology are some of the most effective wealth destroyers the world has ever seen.

What has happened over the past 30 years is the capture of the world's common treasury by a handful of people, assisted by neoliberal policies which were first imposed on rich nations by Margaret Thatcher and Ronald Reagan. I am now going to bombard you with figures. I'm sorry about that, but these numbers need to be tattooed on our minds. Between 1947 and 1979, productivity in the US rose by 119%, while the income of the bottom fifth of the population rose by 122%. But from 1979 to 2009, productivity rose by 80%, while the income of the bottom fifth fell by 4%. In roughly the same period, the income of the top 1% rose by 270%.

In the UK, the money earned by the poorest tenth fell by 12% between 1999 and 2009, while the money made by the richest 10th rose by 37%. The Gini coefficient, which measures income inequality, climbed in this country from 26 in 1979 to 40 in 2009.

In his book The Haves and the Have Nots, Branko Milanovic tries to discover who was the richest person who has ever lived. Beginning with the loaded Roman triumvir Marcus Crassus, he measures wealth according to the quantity of his compatriots' labour a rich man could buy. It appears that the richest man to have lived in the past 2,000 years is alive today. Carlos Slim could buy the labour of 440,000 average Mexicans. This makes him 14 times as rich as Crassus, nine times as rich as Carnegie and four times as rich as Rockefeller.

Until recently, we were mesmerised by the bosses' self-attribution. Their acolytes, in academia, the media, thinktanks and government, created an extensive infrastructure of junk economics and flattery to justify their seizure of other people's wealth. So immersed in this nonsense did we become that we seldom challenged its veracity.

This is now changing. On Sunday evening I witnessed a remarkable thing: a debate on the steps of St Paul's Cathedral between Stuart Fraser, chairman of the Corporation of the City of London, another official from the corporation, the turbulent priest Father William Taylor, John Christensen of the Tax Justice Network and the people of Occupy London. It had something of the flavour of the Putney debates of 1647. For the first time in decades – and all credit to the corporation officials for turning up – financial power was obliged to answer directly to the people.
It felt like history being made. The undeserving rich are now in the frame, and the rest of us want our money back.

The Super Rich Sabotage The Arab Revolutions

By Shamus Cooke

20 June, 2011
Countercurrents.org

With revolutions sweeping the Arab world and bubbling-up across Europe, aging tyrants or discredited governments are doing their best to cling to power. It's hard to over-exaggerate the importance of these events: the global political and economic status-quo is in deep crisis. If pro-democracy or anti-austerity movements emerge victorious, they'll have an immediate problem to solve -- how to pay for their vision of a better world. The experiences thus far in Egypt and Greece are proof enough that money matters. The wealthy nations holding the purse strings are still able to influence the unfolding of events from afar, subjecting humiliating conditions on those countries undergoing profound social change.

This strategy is being ruthlessly deployed in the Arab world. Take for example Egypt, where the U.S. and Europe are quietly supporting the military dictatorship that replaced the dictatorship of Hosni Mubarak. Now Mubarak's generals rule the country. The people of Egypt, however, still want real change, not a mere shuffling at the top; a strike wave and mass demonstrations are testing the power of the new military dictatorship.

A strike wave implies that Egyptians want better wages and working conditions; and economic opportunity was one of the central demands of the revolutionaries who toppled Mubarak. But revolutions tend to have a temporarily negative effect on a nation's economy. This is mainly because those who dominate the economy, the rich, do their best to sabotage any social change.

One defining feature of revolutions is the exodus of the rich, who correctly assume their wealth will be targeted for redistribution. This is often referred to as "capital flight.” Also, rich foreign investors stop investing money in the revolutionary country, not knowing if the company they're investing in will remain privately owned, or if the government they're investing in will strategically default and choose not to pay back foreign investors. Lastly, workers demand higher wages in revolutions, and many owners would rather shut down -- if they don't flee -- than operate for small profits. All of this hurts the economy overall.

The New York Times reports:

"The 18-day [Egyptian] revolt stopped new foreign investment and decimated the pivotal tourist industry... The revolution has inspired new demands for more jobs and higher wages that are fast colliding with the economy's diminished capacity...Strikes by workers demanding their share of the revolution's spoils continue to snarl industry... The main sources of capital in this country have either been arrested, escaped or are too afraid to engage in any business..." (June 10, 2011).

Understanding this dynamic, the rich G8 nations are doing their best to exploit it. Knowing that any governments that emerge from the Arab revolutions will be instantly cash-starved, the G8 is dangling $20 billion with strings attached. The strings in this case are demands that the Arab countries pursue only "open market" policies, i.e., business-friendly reforms, such as privatizations, elimination of food and gas subsidies, and allowing foreign banks and corporations better access to the economy. A separate New York Times article addressed the subject with the misleading title, Aid Pledge by Group of 8 Seeks to Bolster Arab Democracy:

"Democracy, the [G8] leaders said, could be rooted only in economic reforms that created open markets ...The [$20 billion] pledge, an aide to President Obama said, was “not a blank check” but “an envelope that could be achieved in the context of suitable [economic] reform efforts.” (May 28, 2011).

The G8 policy towards the Arab world is thus the same policy the International Monetary Fund (IMF) and World Bank have pursued against weaker nations that have run into economic problems. The cure is always worse than the disease, since "open market" reforms always lead to the national wealth being siphoned into the hands of fewer and fewer people as public entities are privatized, making the rich even richer, while social services are eliminated, making the poor even poorer. Also, the open door to foreign investors evolves into a speculative bubble that inevitably bursts; the investors flee an economically devastated country. It is no accident that many former IMF "beneficiary" countries have paid off their debts and denounced their benefactors, swearing never to return.

Nations that refuse the conditions imposed by the G8 or IMF are thus cut off from the capital that any country would need to maintain itself and expand amid a time of social change. The rich nations proclaim victory in both instances: either the poorer nation asks for help and becomes economically penetrated by western corporations, or the poor country is economically and politically isolated, punished and used as an example of what becomes of those countries that attempt a non-capitalist route to development.

Many Arab countries are especially appetizing to foreign corporations hungry for new investments, since large state-run industries remain in place to help the working-class populations, a tradition begun under the socialist-inspired Egyptian President, Gamal Abdel Nasser that spread across the Arab world. If Egypt falls victim to an Iraq-like privatization frenzy, Egypt's working people and poor will pay higher prices for food, gas, and other basic necessities. This is one reason, other than oil, that many U.S. corporations would also like to invade Iran.

The social turmoil in the Arab world and Europe have fully exposed the domination that wealthy investors and corporations have over the politics of nations. All over Europe "bailouts" are being discussed for poorer nations facing economic crises. The terms of these bailout loans are ruthless and are dictated by nothing more than the desire to maximize profits. In Greece, for example, the profit-motive of the lenders is obvious to everyone, helping to create a social movement that might reach Arab proportions. The New York Times reports:

"The new [Greece bailout] loans, however, will only be forthcoming if more austerity measures are introduced...Along with faster progress on privatization, Europe and the [IMF] fund have been demanding that Greece finally begin cutting public sector jobs and closing down unprofitable entities." (June 1, 2011).

This same phenomenon is happening all over Europe, from England to Spain, as working people are told that social programs must be slashed, public jobs eliminated, and state industries privatized. The U.S. is also deeply affected, with daily media threats about the "vigilante bond holders" [rich investors] who will stop buying U.S. debt if Social Security, Medicare, and other social services are not eliminated.

Never before has the global market economy been so damningly exposed as biased and dominated by the super-wealthy. These consciousness-raising experiences cannot be easily siphoned into politicians promising "democracy,” since democracy is precisely the problem: a tiny minority of super-rich individuals have dictatorial power due to their enormous wealth, which they use to threaten governments who don't cater to their every whim. Money is thus given to subservient governments and taken away from independent ones, while the western media never questions these often sudden shifts in policy, which can instantly transform a longtime U.S. ally into a "dictator" or vice-versa.

The toppling of dictators in the Arab world has immediately raised the question of, "What next"? The economic demands of working people cannot be satisfied while giant corporations dominate the economy, since higher wages mean lower corporate profits, while better social services require that the rich pay higher taxes. These fundamental conflicts lay just beneath the social upheavals all over the world, which came into maturity with the global recession and will continue to dominate social life for years to come. The outcome of this prolonged struggle will determine what type of society emerges from the political tumult, and will meet either the demands of working people or serve the needs of rich investors and giant corporations.

Shamus Cooke is a social service worker, trade unionist, and writer for Workers Action ( www.workerscompass.org ) He can be reached at shamuscooke@gmail.com

Iceland broke the rules and got away with it

Now Ireland and Portugal wish they too had got tough with the markets


* Aditya Chakrabortty
o The Guardian, Tuesday 12 April 2011


Remember Iceland? In the autumn of 2008, it became the first national casualty of the financial meltdown; the first rich country in more than three decades to take an IMF bailout. Commentators declared it the Icarus economy, which had finally come crashing back down to earth. It became both parable and laughing stock. What's the difference between Iceland and Ireland, joked traders – one letter and a few months.

You don't hear much about the insolvent island any more – apart from occasions such as this weekend, when Icelandic voters were asked to repay the £3.5bn owing on collapsed bank Icesave, and replied with a firm "Nei".

Unnoticed it may be, but Reykjavik now serves as a very different kind of parable, of how to minimise the misery of financial collapse by ignoring economic orthodoxy. And in those other broke European economies – from Dublin to Athens to Lisbon – politicians and voters are starting to pay attention. After its three biggest banks – 85% of the country's financial system – failed in the same week, Iceland did two remarkable things. First, it let the banks go under: foreign financiers who had lent to Reykjavik institutions at their own risk didn't get a single krona back. Second, officials imposed capital controls, making it harder for hot-money merchants to pull their cash out of the country.

These policies were not just controversial; they represented a two-fingered salute to the polite society of academics and policy-makers who normally lay down the laws on economic disaster management.

Compare Iceland's policies with those followed by another tiny country in the North Atlantic, which also has a banking industry much bigger than its national economy. When the credit crunch came to Dublin, the government decided to underwrite the entire banking industry – including tens of billions of euros of loans made by foreign investors. That landed the country with a debt worth something like €80,000 for every household – a debt that effectively bankrupted the country.

"A reverse Robin Hood – taking money from the poor and giving to the rich," is how Anne Sibert, a member of the Central Bank of Iceland's monetary policy committee, describes the Irish policy. But Dublin was merely following the old free-market tradition that rules governments should never break faith with financiers.

Yet looking at the two countries now, it's hard to say that Ireland has prospered out of being orthodox, or that Iceland has suffered an especially terrible punishment for not sticking to the Way of the Markets.

Indeed, the evidence seems to point the opposite way: Iceland has come through in better condition than anyone in 2008 dared hope. The worst of its recession is over, even though it's still too early to talk about sustained growth, and the unemployment rate (7.5%) is just over half that of Ireland (13.6%). Remarkably, after the krona lost more than half its face value, inflation is also coming down quite sharply. And without having to pay back foreign creditors, the government's finances are also in better shape. In Ireland, on the other hand, the government has just injected more money into its banking sector – the fifth time it has had to do so.

Now, this is a picture that needs more qualifications than a brain surgeon. For a start, you wouldn't wish Iceland's fate on any economy. Huge spending cuts are still to kick in, and a lot more pain is in store. Thor Gylfason, an economist at the University of Iceland, reckons it will take another seven to 10 years before his country recovers from one of the worst economic disasters in recent history. This will be a long, slow haul.

But landed with an almost unbearable burden, Iceland has made the load easier on itself – and it has done so by getting tough with foreign speculators who lent money to the country at their own risk. In Dublin, on the other hand, as Irish MP Stephen Donnelly puts it, "the entire Irish people were made collateral for the banking system" – and its economic performance has not been remarkably better. More than that, there is a basic point about fairness: in Ireland, keeping the markets on side was deemed to be more important than keeping people in jobs – in Iceland, the priorities have been reversed.

Donnelly says that the Icelandic example is beginning to attract interest in the Dáil and in the media. An Icelandic politician was recently interviewed by Vincent Browne, the Irish equivalent of Jeremy Paxman. In the bust countries of southern Europe they're also starting to take notice. Last week, on the day that Portugal finally admitted it would need a bailout from Brussels, I was talking to Joana Gorjão Henriques, a journalist from Lisbon. She told me that her contacts were pasting stories about Iceland on Facebook, and that newspaper columnists were using Iceland's case as an example that Portugal, Greece and Ireland should follow – make an allegiance and say to the EU that they won't pay the debt.

There are echoes here of the Asian financial crisis of the late 90s. Then Malaysia's prime minister Mahathir Mohamad brought in capital controls to shore up a battered financial system – and he was pilloried from Washington to Wall Street. Nobel laureates in economics predicted imminent catastrophe for Malaysia; the International Monetary Fund effectively told Mohamad off. But the year after, Malaysia began a strong economic recovery, and now the IMF issues papers on the usefulness of capital controls.

Iceland was a country wrecked by implementing free-market dogma crudely and quickly; it may yet became another such lesson of how an economy can ignore free-market dogma – and come out far better than its critics predicted.

Privatisation has been a train wreck

 

 

With National Express abandoning a franchise, the system is bankrupt. Railway nationalisation is the only rational solution.

Ken Livingstone

guardian.co.uk, Thursday 2 July 2009 18.30 BST

The temporary nationalisation of the east coast mainline service should be another nail in the coffin of the privatisation of the railways. It shows once again what a bad deal for taxpayers the privatisation of the railways has turned out to be.

The government says it plans to return the franchise as quickly as possible to a private contractor, but it should instead take the opportunity to retain the line in public hands. Following, as it does, the fiasco of Railtrack, which brought the national rail network to the brink of collapse in 2002, and the collapse of Metronet, in charge of two thirds of the misguided public private partnership (PPP) on the tube, this is the right time to plan returning the entire national rail network to public ownership. If the government tossed aside the ideological blinkers of the Treasury and got that message, they would do themselves a great deal of good among passengers and taxpayers alike.

It is a complete con for the National Express group to walk away from the contract, leaving a gap in the national rail budget, forcing the state to bear the cost while the service is re-franchised – possibly at a lower value than the National Express contract – but insisting on its right to continue to operate other franchises unscathed. National Express says it has received "clear and detailed" legal advice that it does not have to hand back its London to Essex franchise and East Anglia routes. So it wants to run away from a problem on one line and let the rest of us pick up the pieces, while continuing to make profits from other lines.

The attempt of National Express to avoid any consequences for their other franchises from their abandonment of the east coast service is just another example of the privateers trying to take the public sector for a ride. As Lord Adonis says, "It is simply unacceptable to reap the benefits of contracts when times are good, only to walk away from them when times become more challenging."

Time and again, we have seen the nationalisation of losses and the privatisation of profits. It's also the latest demonstration that it is a fairy tale that privatisation means the private sector takes the risk as well as taking its profit. In truth, every time a privatisation of a vital public service fails, the public sector picks up the tab. This culture of parts of the private sector fleecing the taxpayer has to stop.

Part of the problem is that civil servants are taken to the cleaners in the construction of the privatisation contracts by the private companies' sharper legal teams. One of the rationales for the tube's PPP was that it made no sense to hand billions of pounds of public money for tube upgrades over to London Underground management and civil servants who had such a poor record of delivering. Yet, these same civil servants were left to draw up the detail of the PPP contracts. They were completely turned over by the private sector.

But the real issue is that it is inherently wasteful to run these services on privatised lines. The nature of the privatising companies is that a significant proportion of the profits of their activities have to be paid in dividends to shareholders rather than reinvested in the service. This is money wasted. A publicly-owned company would be obliged to reinvest any revenues back into the transport system.

Furthermore, privatisation is justified on the grounds that the private sector is driven, through the rigour of competition, to be more efficient and more responsive to passengers' needs. This is a fiction in the case of a natural monopoly like a railway. Apart from the brief period of competition among bidders for contracts, there is no day-to-day competition at all – no one is going to build a rival railway line and poach passengers from the private franchisee. They are under no pressure from any competition at all. In such circumstances, it is more rational, and makes more sense in terms of sustaining investment, for rail services to be publicly-owned.
Nor is it the case that public ownership of the rail network naturally has to involve poorer management than the private sector.

There are many publicly-owned rail companies all over the world that provide services that British transport users can only envy. The task is to build up good quality management, including the best management from around the world, overseeing real investment that meets the needs of rail travellers.

It shouldn't just be the east coast service that's nationalised and it shouldn't just be temporary. Ultimately, the rail network would

be more rationally run in the public sector.

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