A Level Economics 48: Nationalisation

Nationalisation refers to the process in which the government takes ownership and control of privately-owned companies, industries, or assets. It involves transferring the ownership and operation of these entities from private hands to the public sector.

Argument for Nationalisation: The argument for nationalisation is primarily based on the belief that certain industries or services are best managed and operated by the government to serve the interests of the public and the nation as a whole. Proponents of nationalisation often cite the following reasons:

1. Public Interest and Welfare: Nationalisation aims to ensure that essential goods and services, such as healthcare, education, and utilities, are provided to all citizens at affordable prices and without discrimination. It prioritizes public interest and welfare over profit motives.

2. Natural Monopolies: Some industries, like water and electricity distribution, have natural monopolies due to high fixed costs and economies of scale. Nationalisation can prevent private monopolistic practices and ensure equitable access to such services.

3. Strategic Importance: Nationalisation is often advocated for industries considered strategically important for the country's security, economic stability, or technological advancement. This includes sectors like defense, energy, and transportation.

4. Market Failure Correction: Nationalisation can address market failures, particularly when private firms fail to provide essential services adequately or when industries experience excessive volatility.

5. Long-term Planning: The government's involvement can facilitate long-term planning and investment in infrastructure, research, and development, which may be challenging for private firms with short-term profit goals.

6. Income Redistribution: Nationalisation can be seen as a mechanism to redistribute wealth and reduce income inequality by ensuring profits benefit the wider population rather than private shareholders.

Historical Examples of Nationalisation:

1. Post-World War II: After World War II, the UK undertook significant nationalisation efforts, bringing key industries like coal mining, railways, and steel production under public ownership. The goal was to rebuild the nation's infrastructure and secure critical industries.

2. 1970s Oil Crisis: In response to the 1970s oil crisis, several countries, including Venezuela and Mexico, nationalised their oil industries to gain greater control over energy resources and protect national interests.

Current Examples of Nationalisation:

1. Healthcare: Countries like the United Kingdom and Canada have nationalised their healthcare systems to provide universal healthcare to all citizens, regardless of their income or social status.

2. Public Utilities: In some countries, utilities such as water and electricity supply are nationalised to ensure that these essential services are accessible and affordable to the entire population.

Evaluation of the Argument for Nationalisation: The argument for nationalisation has both strengths and weaknesses:

Strengths:

• Ensuring Essential Services: Nationalisation can guarantee essential services for all citizens and reduce the risk of profit-driven price increases or exclusions.
• Strategic Control: In certain industries, nationalisation provides greater control and stability, safeguarding national interests and security.
• Long-term Planning: Nationalised industries can prioritize long-term investments and research without short-term profit pressures.

Weaknesses:

• Efficiency Concerns: Nationalised industries may suffer from inefficiency and bureaucratic practices, resulting in suboptimal performance and higher costs.
• Budgetary Burden: Nationalisation requires significant government funding, which may lead to increased public debt or budgetary challenges.
• Lack of Competition: In some cases, nationalisation may lead to a lack of competition, hindering innovation and consumer choice.

The debate over nationalisation is complex and often depends on specific circumstances and industries. Some proponents argue that nationalisation is essential for the provision of crucial services and strategic control, while opponents stress the potential inefficiencies and risks of excessive government control. A balanced approach might involve a combination of private and public ownership, with appropriate regulation to ensure the best outcomes for the economy and the welfare of citizens.

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I worked on the privatisation of England’s water in 1989. It was an organised rip-off

Taxpayers lost out, and consumers have paid through the nose ever since. This failed regime is long past its sell-by date writes Jonathan Portes in The Guardian

 


“You could be an H2Owner.” That was the slogan, to the sound of Handel’s Water Music, of the 1989 campaign to sell shares in the 10 water and sewage companies of England and Wales – not quite as memorable as British Gas’s earlier “Tell Sid” campaign, but almost as successful. Although water privatisation was extremely unpopular, with every poll showing that a substantial majority of people were opposed to the policy, that didn’t stop more than 2.5 million people applying for shares. The offer was nearly six times oversubscribed.

The only surprise is that it wasn’t much more. Long before anyone talked about “magic money trees”, the Thatcher government offered one: this was free money to anyone who filled in the application form. The average gain to investors on the first day of trading was 40%, and over the next two decades the privatised water companies paid more than £57bn in dividends, at the same time as running up large amounts of debt, the interest on which is effectively paid for by customers.

So how did we get it so wrong? I mean me, not you. I was a very junior Treasury official working on the water privatisation project, responsible for securing value for money for taxpayers and water consumers. In retrospect, we utterly failed on both counts: the shares were sold well below their value so taxpayers lost out, and consumers have paid through the nose ever since. But this is not just hindsight. We knew what was going on, because water privatisation was never really about efficiency. In the short term, the overriding political priority was a “successful” sale – one where demand for shares was high – and where those who applied and who had, from previous privatisations, already come to expect a large premium, were not disappointed.

That meant that the Treasury’s position, when arguing for a higher share price or for tighter regulation to restrain bills in the future, was exceptionally weak. The National Audit Office report on the sale details how the forecast proceeds fell by more than a third over just three months, costing taxpayers £6bn or so in today’s money, as the Treasury was steamrollered by the combined forces of the water companies’ management, the Department of the Environment, No 10 and a huge army of investment bankers, accountants and PR consultants.

In our (partial) defence, we hoped that this was a one-off transfer of wealth from taxpayers and consumers to shareholders, and that over the longer term, if we got the regulatory structure right, shareholder returns would return to something more like “normal”, as the Office of Water Regulation (Ofwat) found its feet and sought to defend the interest of consumers. But as we now know, we were wrong. Just this morning, the hapless chief executive of Ofwat, David Black, was on the Today programme, claiming that Thames Water was penalised for excessive leaks. It was left to the indefatigable Feargal Sharkey to put the numbers in perspective.

Paradoxically, while the underpricing of the water and sewage companies helped fulfil Thatcher’s short-term goal of a successful sale that was lucrative for those who bought shares, it fatally undermined her long-term goal, which was to create a “shareholding democracy” that would parallel the way right-to-buy created a “property-owning democracy”. The problem was that few small shareholders could resist the temptation to cash out their large profits.

So, as they sold their shares, the companies were bought up, mostly by private equity, institutional investors and large infrastructure firms from abroad. These investors spotted the combination of large investment programmes, effectively guaranteed returns, and a supine and underpowered regulator that lacked access to high-powered economic consultants and lawyers. The result is that companies have been loaded with debt that has permitted huge returns for shareholders. Meanwhile, regulators have allowed returns that have been high or higher than an average risky private company, yet investors have been exposed to no more risk than government bonds. As the Financial Times puts it, 30 years on, “water privatisation looks like little more than an organised rip-off”.

Where next? Here it’s worth engaging with an interesting but deeply self-contradictory defence of the sector by the head of the Centre for Policy Studies, Robert Colvile. He acknowledges upfront that the “water companies are essentially contractors. They are running the water network on behalf of the state, in a fashion agreed with the state, to targets laid down by the state.”

Indeed – so why should directors get million-pound salaries and bonuses? Why should shareholders and bondholders get returns far in excess of those we offer to investors in government debt? His answer to this is that the “single greatest justification for privatisation is competition for capital”; by which he means that if water companies were in the public sector, their investment would be in competition with other priorities, from HS2 to hospitals, and the result, inevitably, would be underinvestment.

This is helpful for two reasons. First, it’s more credible than other defences of privatisation. It doesn’t claim some mythical gains from the magic of competitive markets. Nor is it an economic argument. From a rational perspective, there’s no reason why the government can’t invest as much as is justified by the underlying economics. Instead, Colvile’s argument is political. It implies that governments, especially but not only Conservative ones, pursue stupid, self-defeating policies for short-term political reasons, so it’s worth consumers massively overpaying the private sector to secure the level of investment that is required, even if the public sector could, in theory, do it more cheaply.

Second, this points to a potential way forward that could avoid both the upheaval of renationalisation and the continued reliance on a failed regulatory regime. At the moment, the water companies are simply permanent regulated monopolies. But if those operating the water companies are contractors delivering a public service, why not, as regulatory expert Dieter Helm suggests, treat them as such, and force them to bid competitively for the right to operate? One thing we know for sure is that the current model, where companies face public sector levels of competition and risk, and get private sector levels of profits and return, has long past its sell-by date.

We must tax profits now, freeze energy prices – and if necessary bring suppliers into the public sector

Without urgent action, families are seeing nothing more than pain now and pain later. There is a way through writes former PM and Chancellor Gordon Brown in The Guardian

The energy cap has to be suspended before 26 August, the date on which an approximately 80% increase in our energy bills is expected to be announced. Photograph: Peter Byrne/PA


Time and tide wait for no one. Neither do crises. They don’t take holidays, and don’t politely hang fire – certainly not to suit the convenience of a departing PM and the whims of two potential successors and the Conservative party membership. But with the country already in the eye of a cost of living storm, decisions cannot be put on hold until a changeover on 5 September, leaving impoverished families twisting in the wind.

The energy cap has to be suspended before 26 August, the date on which an approximately 80% increase in our energy bills is expected to be announced. The Department for Work and Pensions computers, which adjust universal credit and legacy benefits, have to be reprogrammed in the next few days if help is to be given to all who need it when prices rise on 1 October. Voluntary cuts in energy usage – good for our green agenda – should, as has happened in Germany and France, be agreed upon now when the weather is good if we are to prevent rationing later when the weather turns bad. And windfall profits and bonuses have to be properly taxed now before the money flees the country.


There were two great lessons I learned right at the start of the last great economic crisis in 2008: never to be behind the curve but be ahead of events; and to get to the root of the problem. And it is not tax cuts or, as yet, a wage-price inflation spiral that are the most urgent priorities for action, but dealing with the soaring costs of fuel and food: the cause of half of our current inflation.

So it is indeed urgent that the candidates to be prime minister – and the current prime minister and chancellor – meet to make not just one or two but several urgently needed decisions: to suspend and fundamentally reform the energy price cap; to agree October payments for those who will not be able to afford to turn up their heating; to home in on alternative supplies abroad and open up appropriate storage facilities at home; to agree voluntary energy reductions; and to help pay for these measures with a watertight windfall tax on energy companies and a tax on the high levels of City bonus payments. For if we could remove the opportunity to avoid or opt out, as we did when imposing the windfall tax on privatised utilities in 1997 and the banker bonus levy of 2009, we could raise not just £5bn but as much as £15bn. This would be enough, for example, to give nearly 8 million low-income families just under £2,000 each.

All these measures should be based on a clear set of principles: that the right to a warm home is a human right; that we should do most for those who have least; and that no energy retailer should be allowed to additionally profit from the crisis.

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What’s more, British ministers – and no one has yet grasped this – should also be leading the way, as we did in 2009, in demanding coordinated international action with an emergency G20 early in September to address the fuel, food, inflation and debt emergencies. These are global problems that can only be fully addressed by globally coordinated solutions.

Tuesday’s forecast from Cornwall Insight of a £4,266 average annual energy price by January is remarkable. It means, as an immediate analysis carried out by Jonathan Bradshaw and Antonia Keung shows, that more than half of British households, 54%, will be in fuel poverty by October and two-thirds, 66%, by January. Six million households, an astonishing number, will be forced to pay an unprecedented 25% of their income in fuel costs and 4.4 million will be subject to a virtually unaffordable 30%.

So instead of allowing Ofgem to announce an increase on a scale that will send shock waves through every household, the government should pause any further increase in the cap; assess the actual costs of the energy supplies being sold to consumers by the major companies; and, after reviewing the profit margins, and examining how to make standing charges and social tariffs more progressive, negotiate separate company agreements to keep prices down. They should work with businesses to cut consumption, as is happening in France and Spain, which have imposed their own cap on energy prices, dictated more by what people can afford than the current wholesale gas price in the marketplace.

And if the companies cannot meet these new requirements, we should consider all the options we used with the banks in 2009: guaranteed loans, equity financing and, if this fails, as a last resort, operate their essential services from the public sector until the crisis is over.

With one of our main suppliers, Norway, seeking to retain its own gas for domestic use and France running into problems with its nuclear reactors, we are already running out of time to negotiate new deals with other international suppliers. And we are already missing out of additional capacity from Qatar, which has gone to mainland Europe. Over time, we can and must increase domestic production, and agree on a home insulation programme with the same urgency as our vaccination programme.

It’s true that Britain’s decade-long low growth, caused by low investment, has made us vulnerable to skill shortages and supply-side bottlenecks and thus higher inflation than our competitors. But most of the current rise in inflation has been generated from energy and food prices caused by the war in Ukraine and so removing the Bank of England’s independence is merely an exercise in blame shifting, as is direct criticism of the Treasury which, in my view, will take its lead from ministers.

It is the government that sets the inflation target and appoints the Bank’s main decision-makers. And it is the duty of government in a crisis to send the Bank an open letter telling it to set out a clear pathway over the coming years to return to stable prices. On the basis of an agreed inflation trajectory back to 2%, we should consider agreeing year-on-year wage settlements – starting with a flat rate of between £2-3,000 this year – so that hardworking families, especially those on the lowest incomes, can afford their energy bills without being plunged into poverty.

The truth is that without a plan the government is lurching from one crisis to another, failing to address the anxieties of families who see nothing more than pain now and pain later. But there is a way through from pain today to gain tomorrow, not just through the immediate relief I propose but in a clear strategy to move us from the 1.4% annual growth that the Conservatives have achieved back to a 2.5% trend growth rate. This is the one way to permanently end the cost of living crisis that British families have had to endure through an austerity decade.

No one can be secure when millions feel insecure and no one can be content when there is so much discontent. Churchill once said that those who build the present in the image of the past will utterly fail to meet the challenges of the future. Only bold and decisive action starting this week will rescue people from hardship and reunite our fractured country.

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There is no longer any justification for private schools in Britain

Labour is right to debate the future of these unjust institutions, which at last are no longer seen as untouchable writes Frances Ryan in The Guardian

 

Pupils at Harrow school, London: ‘Removing charitable status is rightly no longer seen as radical.’ Photograph: Alamy Stock Photo


A few years back, I finished a PhD on how to tackle Britain’s unequal life chances – which, among other measures, included abolishing private schools. Dusty academia seemed the home for this sort of proposal, one that has long filled endless papers but never quite makes it off the page and into reality.

That is no longer the case. In a few days, the Labour party will debate the future of private schools. The grassroots group Labour Against Private Schools (Laps) will bring a motion to the annual party conference in Brighton calling for the full integration of state and private schools, including nationalising the endowments of the hugely wealthy public schools. It has support from six constituency parties so far and the backing of senior party figures, with the shadow chancellor, John McDonnell, putting his weight behind the motion this week. A leaked memo to the Telegraph last week noted that the party is already considering making a manifesto pledge to remove tax breaks from the sector – while leaving the door open to getting rid of the schools altogether.

Removing charitable status is rightly no longer seen as radical. In 2017, that well-known lefty Michael Gove declared that private schools were “welfare junkies”, calling the VAT exemption “egregious state support to the already wealthy so that they might buy advantage for their own children”. The classic argument that private schools deserve tax breaks because they provide bursaries to poorer children is as thin as paper: in 2017, only 1% of private school pupils were schooled for free, while figures show “financial assistance” is considerably more likely to go to affluent middle-class families than children in need. 

It’s exciting, then, that the conversation is no longer restricted to this. For decades, private schools have held an untouchable air in this country. We know very well the damage they cause – both to the children whose education is harmed by losing advantaged peers and their influential parents, and to a society that is stifled by positions of power handed out on the basis of wealth rather than talent. We know how bizarre this set-up is – that 7% of schoolchildren will go on to control much of the media, the judiciary and parliament. And yet it is greeted with borderline rabid resistance by many commentators, while even those on the left have been reluctant to argue for comprehensive solutions. It typifies the worst of class privilege, where a small section of society is permitted to buy power and influence despite all the evidence of the damage that causes, and the rest of us must shrug our shoulders and accept this as an inevitability.

What feels different now is that these ideas are becoming mainstream at a tipping point in this country. Years of austerity have highlighted the resources gap between the highly funded private sector and the starved state sector. When many working-class children don’t have basic equipment in class, the dominance of elite schools feels even more obscene. The calamity of Eton alumni taking their turn at Downing Street, meanwhile, is now a real-time display of how dysfunctional a nation becomes when structured to be forever run by a tiny pocket of the wealthy.

The abolition of private schools is not an outlandish idea but rather an extension of what we already do. Societies constantly set limits on how far a parent can go in giving their child an advantage in life – that’s why it’s illegal for a mother to bribe a university admissions officer to give her son a place, and unethical for a father to do his daughter’s GCSE coursework. This is because it is widely understood that no matter how natural a parent’s desire to do the best for their child, it does not trump the good of society. Other countries, such as Finland, have already acted on this by slowly merging private and state schools.

When many working-class children don’t have basic equipment in class, the dominance of elite schools feels even more obscene

That the recent Telegraph front page had to rely on the retro “politics of envy” accusation to describe Labour’s ideas – akin to a playground cry of “You’re just jealous!” – shows how weak critics’ arguments are. In an era in which the damage of inequality is ever clearer and the movements to tackle it are growing stronger, those who cannot comprehend a desire to make life fairer for other people’s children sound increasingly out of touch.

It’s clear that tackling private schools alone is not enough to level the playing field, but that there are multiple causes of inequality doesn’t seem a good argument to ignore one of them.

The protection of a two-tier school system comes down to a fundamental question about what we think education should be. If we want the education system to be about giving every child a fair shot, then merging state and private schools is the logical move. The question is: what is really stopping our children being educated together?

Rail: frustration grows with Britain’s fragmented network

Jonathan Ford and Gill Plimmer in The Financial Times

Craig Johnstone checked tickets and train doors for more than 30 years. But if the job did not change, the uniform did: five times he donned new colours bearing fresh slogans as a different company took over running the Leeds to Manchester and Carlisle service. 

“Every uniform gets a little tighter — and I can’t fit into the old ones,” he says. “They change the roles and description and then they change them back again. That’s all the rail operating companies do. It’s continuous change, but all that changes are the colours and the corporate brands.” 

Change was supposed to mean more than just a new cap and blazer when John Major’s Conservative government released its plan to split up British Rail in 1992. Then UK ministers outlined a vision of private companies bidding for franchises and bringing fresh ideas, dynamic management and innovation. 

“More competition, greater efficiency and a wider choice of services more closely tailored to what customers want,” proclaimed the 21-page white paper that drove forward a privatisation that had been too controversial even for Margaret Thatcher, his predecessor, to risk.

Two decades on, passenger numbers have more than doubled since the last year under British Rail. The UK network saw 1.7bn passenger journeys in 2016-17, against 735m in 1994-95. After decades of decline, Britain’s trains are busier than at any time since the first world war. 

But behind the numbers lies a conundrum: how much of this is due to the benefits of privatisation, rather than demographic factors such as the shift to the suburbs, increasing urban congestion and a rising population? 

Privatisation has certainly led to more train services. According to an EU study in 2013, the UK’s trains and tracks are now more intensively used than any other developed European market bar the Netherlands, and this has undoubtedly contributed to the growth in passengers. 

Investment is up too; it is running at around four times the £1.6bn a year it averaged in the late 1980s, with £925m coming from the private sector last year, mainly to fund new rolling stock. 

“Privatisation reduced the malign influence of HM Treasury which wouldn’t allow a proper investment programme,” says Lord Freud, a former banker who advised on rail privatisation. 

But it is not obvious that two decades of private ownership have led to similar advances in service quality or have made the network more financially sustainable and secure. 

“It’s very hard for people to travel around and not suffer from the cracks in the system,” says Christian Wolmar, a train historian. “It’s everything, from knowing who to buy a ticket from to the signalling failure that delays the train to the lack of information when your train is cancelled. It’s hard to know which is worse — fragmentation or privatisation — but I’d probably say fragmentation.” 

The break-up of the network is perhaps the most hotly debated legacy of the sell-off. Instead of pushing British Rail into the private sector as a single regulated monopoly akin to water or electricity, the government chose to break it into three components of track, rolling stock and train operators, and then to sell it in no less than 100 pieces between 1995 and 1997. 

This process has not made the network cheaper to operate. The cost of running the UK’s railways is 40 per cent higher than it is in the rest of Europe, according to a 2011 government report by Sir Roy McNulty, the former boss of UK aviation group Short Brothers who has long experience in transport regulation. 

“The train you catch is owned by a bank, leased to a private company, which has a franchise from the Department for Transport to run it on this track owned by Network Rail, all regulated by another office, and all paid for by taxpayers or passengers,” says John Stittle, a professor of accounting at Essex university. “The complexity is expensive.” 

Since privatisation, the bill has mainly been shared between the taxpayer and the passenger. The contribution from the state has almost doubled from £2.3bn in 1996 to £4.2bn in real terms in 2016-17, despite a conscious decision in recent years to push more of the cost on to users’ shoulders. Ticket prices have risen: they are now 25 per cent higher in real terms than in 1995 and 30 per cent higher than in France, Holland, Sweden and Switzerland. The latest average rise in fares of 3.4 per cent, announced on New Year’s Day, was greeted with outrage. 

Privatisation was supposed to unleash efficiencies that would justify the returns private operators demand for their services. So why, more than two decades in, have the UK’s railways not delivered more? 

Despite the vastly expanded usage, the network’s costs have not obviously come down relative to its income. According to the 2011 report, unit costs per passenger kilometre were roughly 20p in 2010, much the same as they were in 1996. 

One reason, suggest the critics, is that privatisation never really took root. The network’s 2,500 stations and 32,000km of tracks were initially vested in a listed company, Railtrack, which collapsed in 2001. The infrastructure has since been back in public hands under the guise of Network Rail. 

Fragmentation, meanwhile, has encouraged each part of the system to prioritise its own profits rather than collaborating to improve the system. “It’s an adversarial relationship with Network Rail,” says one director of a rail franchise. “We call them blame departments. People who sit around at Network Rail and the train companies deciding whose fault it is.” 

Indeed, the subsidies in effect insulate the operators from those extra expenses the network incurs. While it cost £4.1bn to provide maintenance and renewals work on the system in 2016-17, the train operators paid £1.5bn to access the nation’s tracks. This is half of what they paid at privatisation, even though those tracks are now far more heavily used. 

Of the parts of the sector that remain in private hands, it is the train operators that are now the subject of fiercest contention. Although the data on quality are mixed, with the UK performing better than some European countries in terms of punctuality and reliability, there is a perception that service is poor despite all the public subsidies. 

Journeys are often uncomfortable: 23 per cent of customers commuting into London at peak hours have to stand. According to the consumer group Which?, delays of at least 30 minutes afflicted more than 7m journeys last year. 

Critics argue that train operators are able to make returns, and pay themselves dividends, despite contributing very little in the way of risk capital. While operating margins of 3 per cent are not high, the train companies paid nearly all the £868m operating profits between 2012-13 and 2015/16 as dividends — £634m in the four year period. 

The train operators have few tangible assets and almost no exposure to business risk. Indeed, their franchise agreements frequently offer revenue protection should there be an economic decline or changes in London employment levels — the two biggest drivers of passenger numbers. 

What the private owners mainly deliver is marketing nous; promoting services and experimenting with timetables and branding. While more than a third of ticket prices are set by the government, they have freedom to set the remainder at levels they believe the market will bear. 

So deep is the dissatisfaction that one group of long-suffering customers who will pay up to £4,696 this year for a season ticket on the poorly performing Southern service between London and Brighton, just an hour away, created a musical dubbed “Southern Fail”. Following a series of strikes, the satirical website The Daily Mash said Southern had decided to “replace the timetable with an avant-garde poem”. 

As with other privatised monopolies, competition was supposed to ensure lower prices and sharper services. But in recent years this has faded, raising questions over the legitimacy of the franchising system. A third of train operating companies now hold their franchises by so-called “direct awards” from government, rather than auction. 

Successive governments, out of an apparent desire to keep the private sector onside, have been reluctant to wield their powers against poorly performing franchises. Only one train operator has ever been stripped of its contract — Connex for poor performance in south-east England in 2001 and 2003. Three more have walked away after overbidding for contracts, with minimum penalties. 

Last month, the government allowed Virgin Rail and Stagecoach to terminate their East Coast line franchise three years early, saving them the need to write a £2bn cheque to the government under previously agreed revenue growth forecasts. Yet with only a handful of operators bidding for franchises, the duo may end up operating the line again — on more profitable terms. 

Lord Adonis, a Labour peer who recently resigned from the National Infrastructure Commission, called the “bailout” a “scandal” that “threatens to undermine the legitimacy of the whole franchising system”. He argues that the government should keep a state-owned operating company in reserve, to demonstrate to franchisees that it can reassume their obligations if they fail. 

When National Express handed back the keys to the East Coast line franchise in 2009, it was renationalised under an arm’s-length government body called Directly Operated Railways. Nevertheless, during the following five years under state control, it increased ticket sales, returned about £1bn to the taxpayer and delivered record levels of customer satisfaction. 

The rolling stock — which is leased to the train operators for about £1.5bn a year — is still largely owned by three companies: Angel Trains, Porterbrook and Eversholt. Each is in the hands of financial investors, each with convoluted multi-tiered, overseas ownership structures, sometimes making tracing the flow of money difficult. Eversholt is owned by a Hong Kong company with a Cayman Islands subsidiary; Angel mostly by Luxembourg-based investors; and Porterbrook by another consortium of international investors. 

The Competition Commission concluded in 2009 that the rolling stock companies could have cost the taxpayer as much as £100m a year by overcharging operators on leasing rates. More recently, the government has attempted to procure some new trains directly using complex private finance initiative deals — which cuts the rolling stock companies out of the process — although that too has been criticised as poor value for money by public spending watchdogs. 

The government’s micromanagement of procurement has also slowed the pace of ordering, meaning the average age of rolling stock has almost doubled since 2008 to 21 years — roughly the same age as pre-privatisation. 

There is a growing consensus among both executives and industry experts as well as the public that Britain’s unique attempt to create competition on Britain’s rail network has not delivered. 

While it has led to more services, and encouraged more users to pay higher prices, it has not unleashed the productivity improvement necessary both to upgrade the network and stabilise the network’s finances. 

Over the same period, for instance, London’s state-owned metro network, Transport for London, has grown just as quickly and delivered much more state-of-the-art investment.  

This has brought forward calls for more chopping and changing. To deal with the problems of co-ordination and planning, Chris Grayling, the transport secretary and an advocate of private sector involvement, is pressing for formal joint ventures between private franchises and Network Rail on some routes, so that eventually operators can take more responsibility for the tracks. 

Another option — advocated by some franchise holders — is to ape the way Transport for London commissions services from the private sector, taking the revenues and responsibility for service delivery, while contracting out bus and train provision on tightly specified terms. 

Some argue there is a simple solution: reunite track and train in the only feasible manner, a return to public ownership. 

Jeremy Corbyn, the opposition Labour leader, has proposed putting the franchises back under state control as they expire and commissioning trains directly from manufacturers. An October poll by the conservative think-tank Legatum found nearly three-quarters of the UK population agreed with him. 

Labour’s critics, however, say that its plans would do little to solve the well-known failings of Network Rail. “The thing that makes me laugh is how people have forgotten how they used to hate BR,” says Lord Freud. “It was a national laughing stock.” 

As for Lord Adonis, he argues that further revolutionary change is pointless and “no simple ownership change can fix the railways”. 

But back in Carlisle, Mr Johnstone, who now works for the Northern franchise currently run by Deutsche Bahn-owned Arriva, supports a return to state control. “If you scrape the paint off, eventually you get to British Rail. But before you get to British Rail you get to the last time Arriva had the franchise about three coats in,” he adds. “If you keep painting them they won’t make it through the tunnels — there’s that many layers of paint on them.”

Pioneering Britain has a rethink on privatisation

 Jonathan Ford and Gill Plimmer in The Financial Times

It was one of the most influential reports ever written by a modern British economist — and perhaps the most rushed. 

Stephen Littlechild, then a little-known academic, was commissioned by Margaret Thatcher’s government in October 1982 to design a regulatory mechanism that would prevent Britain’s soon-to-be privatised telecoms monopoly, BT, from exploiting its position and gouging the public. 

The work was urgent. The prime minister wished to push through legislation that would enable the company to be sold as soon as possible, making it a pioneer for the privatisation of public utilities that she hoped would create a new shareholding democracy in Britain. She needed the report by January 14 1983, which Prof Littlechild said gave him just “10 working weeks (allowing for Christmas!)”. 

 His formula “was invented between 5 and 7 January 1983” allowing just a single week “to write it up in a plausible way, test it against the specified criteria, [and] conclude that it was the best available option”, Prof Littlechild recalled. 

Fortunately, “RPI minus x” passed muster not only with Mrs Thatcher, but also with BT’s investment bankers, SG Warburg, which thought it vastly preferable to the profit ceiling used by US utilities. “It was politically defensible and even attractive,” recalled Prof Littlechild. It won the day. 

The Littlechild formula has gone on to serve as the template for all UK regulation of privatised utilities. In modified form, it sits at the heart of the mechanisms that still regulate prices set by electricity and water companies. 

That means it is also at the centre of the divide in British politics, which in the past two years has fractured about the merits of allowing private companies to run essential utilities that are natural monopolies. 

After a series of scandals and controversies over poor service, high prices and generous payouts to shareholders, the country that was the global frontrunner in privatisation is rethinking how to run its essential utilities. Almost three decades after they were sold off, critics — and many voters — believe that investors have run rings around the watchdogs set up by the government to regulate the industries. 

Under Jeremy Corbyn, the opposition Labour party has come out firmly for the renationalisation of rail, water, energy and the postal service. 

At the Labour party’s annual conference in September, the shadow chancellor, John McDonnell, promised to bring “ownership and control of the utilities and key services into the hands of people who use and work in them”. 

Labour’s attack has exposed the fragility of public consent for private utilities. An October poll conducted by the UK’s far-from-socialist Legatum Institute showed 83 per cent of respondents favoured the nationalisation of water. For energy, the figure was only slightly lower, at 77 per cent. 

“If you look at this list, you see the public most objects to private ownership of natural monopolies — ones where there is little real possibility of injecting meaningful competition,” says Martin Blaiklock, an infrastructure expert and former head of the European Bank for Reconstruction and Development’s power and energy division. 

 Prof Littlechild’s regulatory system was supposed to substitute for competition, giving consumers a fair price while also offering private owners incentives to innovate and find efficiencies. Charges were set to give operators a reasonable return on their capital assets, indexed for inflation (the retail price index) less a certain amount each year (x) to spur them to drive productivity. 

 What makes Britain’s regime different from the one for private US utilities, for instance, is that these returns are not capped. “We didn’t like the idea of an effective 100 per cent tax on efficiencies over a fixed rate of return,” recalls Prof Littlechild. “Margaret Thatcher’s economics adviser, Alan Walters, was particularly offended by the cap. He said: ‘We can’t do this. It’s socialism!’” 

Instead, every few years the watchdog estimates the costs the company is likely to face in the next regulatory period. If the company can achieve greater savings, it is permitted to keep 100 per cent of the extra it makes. 

 This sounds logical enough. It has helped to usher dozens of utilities into the private sector and support huge investment. But critics allege the system has delivered neither the discipline nor the innovation that was promised. They think regulators have been too lenient in setting the efficiency targets that are used to justify extra returns for private capital. 

Take, for instance, the water industry, which was sold off in 1989. Cathryn Ross, until recently the chief executive of Ofwat, boasted that her organisation’s efficiency demands had saved consumers £120 off bills (which currently average about £400) since privatisation. That may sound a large number, but it equates to an annual productivity improvement of just 1 per cent. It is well below even the anaemic 1.5 per cent average rate for the UK economy over the same period. 

“By giving the companies an easy ride, the regulator has ensured that customers’ bills have risen more than they should have,” says David Hall, director of the Public Services International Research Unit at Greenwich university. In the case of water, they have gone up by about 40 per cent above the rate of inflation since 1989, although the steepest increases took place in the first decade after privatisation. 

Second, regulators have paid too little attention to the way companies structure their finances. Finance costs are a key factor watchdogs weigh when setting prices. Yet they have consistently overestimated these expenses during a long period of falling interest rates. 

That, combined with a reluctance to regulate companies’ balance sheets, has resulted in an orgy of borrowing, as this allows owners to achieve “savings” that have more to do with financial engineering than effort and enterprise. Stratospheric debts — including high yielding shareholder loans — have also suppressed tax revenues. Thames Water, for instance, has paid almost no corporation tax for the past decade. 

In 1989, the water industry in England and Wales was privatised with no net debt. Yet almost three decades on, it has built up borrowings of £42bn. 

All but three of the 10 English water companies have been taken off the stock market by private equity investors — many backed by foreign sovereign wealth funds and pension schemes. In the meantime, all the industry’s post-tax profits have been carried off in the form of dividends. Shareholders’ funds have barely budged since 1989. 

A comparison with Scottish Water is instructive. The Scottish utility was not privatised in 1989, but remained in the public sector. Like its southern cousins, it has been forced into a heavy programme of investment, much of it at the behest of the EU.  

Yet unlike the English utilities, it remains relatively unleveraged. Its borrowings of £3.8bn represent just 48 per cent of the value of its regulated assets, as against the 65-80 per cent that is prevalent in England. Meanwhile, the average bill from Scottish Water was £357 last year — 10 per cent lower than the English average of £395. 

Some believe that tweaks to the regulatory regime could make the system function better. Prof Littlechild argues, for instance, that instead of keeping 100 per cent of any extra efficiency gains, these could be split with the customer. “That way there would be some community of interest,” he suggests. 

Mr Blaiklock, a longstanding critic of excessive leverage in utilities, believes the watchdog should intervene much more in companies’ financial affairs, which he thinks are unsustainable in the long term, especially if interest rates rise. “The regulator should be given stronger executive powers to intervene in extreme financial engineering initiatives and aggressive tax tactics.” 

Faced with mounting criticism, watchdogs are making changes. Ofwat is proposing to alter the payment terms for water companies so that more of their money comes from hitting performance targets. 

Critics warn that this will make an already complex system even more baroque. “You have to question whether any system this involved can be transparent, when even people with an interest in getting to the bottom find it very hard,” says Mr Hall. The intricacy of the regulatory process also troubles Prof Littlechild, who notes that it takes about three years to decide the next regulatory settlement. “When we created it, I fondly imagined the regulator sitting down with the companies shortly before the expiry of each period and just setting a price,” he says. 

 Not everyone is convinced that tweaks are sufficient. Mr Hall argues that the regulatory system is inherently dysfunctional. “There is a fundamental contradiction between the regulator’s duty to protect consumers and its overarching duty to ensure that the companies have enough money to deliver investment,” he says. 

Prof Littlechild’s original idea with BT was that the watchdog would simply hold the fort for the consumer until competition arrived like the US cavalry. Permanent regulation is vulnerable to industry capture. “The problem is that the regulator spends all its time talking to the company and its investors,” says Mr Hall. 

Ofwat, for instance, has been criticised for its focus on investors rather than customers. While the watchdog sets aside two days a year to give presentations to the City of London, there is no forum for it to meet customers. 

While regulators do have the power to strip companies of their licences, this has been invoked only once in the water sector — when the collapse of Enron in 2001 forced Ofwat temporarily to take control of its Wessex Water. 

According to Mr Blaiklock, this lack of grip explains why privatisation has failed to achieve its primary purpose — of passing the operational and financial risks for the delivery of a public service to the private sector. London’s £4.2bn “super sewer”, for instance, is financed directly from customer bills, with households rather than the company bearing the risk of a complex project. 

Few developed countries have copied the British model in selling off whole utility networks to private entities. In Europe, the model has generally been to separate asset ownership from service provision and to grant private companies the right to operate concessions. 

In recent years, doubts about the governance and customer benefits have encouraged other countries to reverse this process — especially in water — and take these concessions back into municipal ownership. A study of French water services in 2004 found that the price of privately-delivered water was 16.6 per cent higher than in places where municipalities delivered the service. 

Similar arguments buttress the Labour party’s plans to bring utilities back into public ownership. 

Its proponents stress not efficiency, which they claim is much the same in either public or private sectors, but cost and accountability. A publicly-owned utility would not have to deliver the returns demanded by the private sector. 

A study by Greenwich university claims that refinancing utility debt and equity with government bonds and scrapping dividends could save £2.3bn a year. That is equivalent to a saving of almost £100 off the average £400 water bill. Public ownership would also remove all the incentives that, Mr Hall claims, encourage bosses to favour financial management over customers. 

 “These are local amenities supplying a basic service that ought to be properly accountable to local people,” he says. 

Other structural options involve introducing more competition by separating network ownership from the services, and auctioning limited concessions. The snag is that this would be extraordinarily expensive, requiring the state both to buy out the existing owners and then retender the operations. Taxpayers could end up paying twice — first to compensate existing investors and then potentially to reward the new operators. 

Lastly, there is the possibility of placing utilities in not-for-dividend entities, akin to Welsh Water, which was restructured in 2000. Although they would remain regulated entities, companies could use retained earnings only to invest in their assets or to cut customer bills. Shareholders and executives would no longer be able to skim off all the cream. 

There may be no cheap and easy answers to the problems facing Britain’s utilities, but the status quo is unlikely to hold. “What we can now see is that the regulatory regime is not robust enough,” says Mr Blaiklock. “We need to change that.”