Nationalisation is about more than price

Tweet

Two days ago, the CBI warned us that Labour’s nationalisation plans would cost taxpayers around £200bn, as well as ongoing costs for such things as maintenance and development of the infrastructure.  Labour’s response, accusing the CBI of "incoherent scaremongering" was, I thought, being rather too kind on the CBI; one would really expect those at the top of UK industry to have a rather better grasp of economics than this.  Richard Murphy has explained very well why the CBI’s statement is utter nonsense – buying assets doesn’t increase total net debt and borrowing money to purchase revenue-producing assets can actually reduce net debt charges.

It’s not often that I agree with the Institute for Fiscal Studies, but their comment that "Economically what matters is whether these assets would be better managed by the public or the private sector" seems to me to hit the nail on the head.  And the real problem with Labour’s proposals is that the history of nationalised industries in the UK has not been a happy one.  Interference and micro-management from Whitehall have often meant that potentially profitable industries have ended up making losses and become a drain on public finance rather than a contributor to them, and their productivity record has often been poor.  The record of ministers and civil servants when it comes to running businesses leaves, shall we say, a lot to be desired.  Things don’t have to be that way, however.  Nationalised industries can be and often are successful elsewhere; the UK’s past experience isn’t an inevitable determinant of future prospects.

There are also some non-economic arguments about whether certain industries – particularly those which one might regard as ‘natural monopolies’ – should be run as public services for the benefit of all, or as private enterprises for the benefit of shareholders.  Apparently ‘profitable’ rail services are only ‘profitable’ because they receive public subsidy – in essence, those subsidies end up paying dividends to shareholders.  It is entirely reasonable to question whether that is the best way of spending the public money which goes into the railway network.

The real cost with Labour’s nationalisation proposals isn’t the cost of purchase itself, it is any additional costs incurred after nationalisation as a result of introducing a different business model.  Sticking with the railways as an example, a political decision to prioritise increasing capacity and reducing prices to encourage passengers to shift from road to rail would lead undoubtedly to a net increase in ongoing government expenditure.  Whether (or rather, to what extent) that would be matched by corresponding savings elsewhere (for instance on roads), or less easily quantifiable benefits such as environmental improvements, is a difficult question to answer.  It is not, though, primarily an economic debate at all – it is a political debate about priorities and the sort of society in which we wish to live.  The CBI’s headline about an “eye-watering” price is a diversion from the entirely proper debate about alternative approaches, as well as being incoherent in its own terms.

Getting there eventually

Tweet It took a while, but the real cost of PFI has finally been recognised by an all-Party committee in the House of Commons.  It is, as many of us were saying all along, an expensive way of borrowing money, became little more than a device for keeping debt off the balance sheet, and should be scrapped.  And some of those who were egging the Welsh government on to not spurn this source of investment capital should feel more than a little egg on their own faces.

No surprise that the CBI want to keep the system; after all, the organisation’s members benefited from it by making greater returns on investment than would otherwise have been the case.  It’s a little misleading to suggest though that this was the only way of attracting private finance to invest in infrastructure.  After all, much of what the government borrows to invest directly comes from private finance – it just doesn’t pay as well.

The other argument for PFI was that it enabled the government to reduce its financial risk.  There is, indeed, an argument – in principle at any rate – for paying a higher effective rate of interest if the project is lower risk, or even risk-free.  It’s a calculation which is complex, but a transfer of financial risk to someone else can justify paying a greater return to them.

The problem with PFI though was that there was little or no transfer of real risk.  The customer – us – remained exposed to most if not all of the risk, and at an often increased level of risk due to the higher cost.  The suppliers of capital, meanwhile, found themselves with a fairly low risk cash cow.  Why wouldn’t they want to keep that system going?

The question now is what happens next.  Will the government do as it has been advised, and buy its way out of these contracts, or will they remain a financial milestone for years to come?

How many councils?

Tweet

I’m in danger of agreeing with both Peter Black and the CBI, which must be a first of some sort.  Up to a point, anyway.  Both of them have called for a commitment to legislation to change the number of Welsh Local Authorities. 

That is a far more honest and open approach to tackling an issue which most people recognise needs to be addressed than the backdoor route currently being pursued by the Welsh Government.  Instructing authorities to share services and resources, and seeking for itself the power to merge councils as and when it sees fit is a centralising, reactive, and ad hoc way of dealing with a serious issue, and is likely to lead to a patchwork quilt of inconsistency across Wales.

But agreeing with the principle of reforming the local authorities in an open and honest fashion is not the same as agreeing with the detail of their proposals.  The CBI propose 7 councils, and Peter Black proposes 8 or 10.  Both of them seem to be picking figures out of the air, and proposing different ideas about what responsibilities councils should have – they look like subjective rather than objective conclusions.

I’ll admit to some subjective views myself – I’m not convinced that 22 councils is the ‘right’ number, and that probably puts me in a majority – for once.  But subjective views about what is or is not the ‘right’ number are hardly a sound basis for a major and costly reorganisation.  The local government set-up is as it is today after two rounds of reorganisation in the past, both driven by what one particular party’s politicians thought was the ‘right’ thing to do.  What we need is a more objective and thought-through approach.

How about resurrecting the idea put forward by Plaid in 2007 of a commission to review the whole issue of powers, financing, numbers and boundaries of all the different bodies governing Wales with a view to putting a structure in place which is fit for the 21^st century?  That has to be better than either tinkering when things go wrong (as seems likely to happen in the case of Ynys Môn), or of choosing a number between 7 and 10 because someone thinks it’s ‘right’.

Nice little earner

Tweet

PFI has been a nice little earner for those companies who’ve been able to take advantage of it.  The theory is that it’s some sort of partnership between the public and the private sector; the reality is that one part of that ‘partnership’ has benefited, whilst the other has lost out.

Those cash-strapped public bodies who found themselves pushed into using the approach have found that they have got shiny new hospitals and schools which they could not otherwise have afforded, but are faced with huge ongoing annual costs about which they can do little.  And that, in turn, has constrained their ability for further investment in other facilities until the end of the contract period.

The companies, on the other hand, have found themselves with a guaranteed source of long-term income, whilst all the risk remains with their customers.  It’s a completely unequal partnership, and has been from the outset.

No real surprise then that the CBI – which represents the sort of companies which have benefited – is again pressing for Wales to use PFI.  From their perspective, it’s a neat way of transferring resources from the public sector into the private one.  But over the long term, it also means that the public sector gets less for a given amount of expenditure – the opposite, in effect, of what the CBI and other organisations have long been urging on government.

The Welsh Government is absolutely right to rule out PFI – and I hope that they will continue to do so.