In Depth

The pros and cons of nationalisation

Debate rages over Labour Party’s pledge to bring energy sector under government control

Labour would take the UK’s energy networks back into state ownership if elected to government, the party has vowed.

Announcing the plan last week, shadow business secretary Rebecca Long-Bailey said that the nation’s decades-old privatised system was an “insult and an injustice to our people and our planet”, reports the i news site.

“Only by taking the grid into public ownership can we decarbonise the economy at the pace needed to secure the planet for our children and grandchildren while ending the rip-off, creating good jobs in local communities and making heating and electricity a human right,” she added.

But any renationalisation programme would be extremely controversial, with critics of state ownership pointing to issues of cost, efficiency and sluggish innovation.

The Confederation of British Industry (CBI) has claimed that Labour’s plans would make the country poorer, hinder efforts to tackle climate change and risk a return to the frequent power cuts of the past, The Guardian reports.

“These plans would threaten significant improvements in network resilience made since privatisation,” said CBI chair Matthew Fell. 

But are those claims justified? Here’s a look at the pros and cons of nationalisation.

Pros

Public interest

In industries that perform an important public service such as health care, education and public transport, “the profit motive shouldn’t be the primary objective of firms and the industry”, yet privatising such sectors can result in just such priorities, says information site Economics Help.  

One example of how nationalisation can benefit the public interest is England’s East Coast Main Line, a rail route running from London to Edinburgh. In 1997, the line was privatised, but in 2009 operator National Express East Coast was stripped of the franchise after getting into financial difficulties. 

The line was then returned to state control for the next six years, during which period customer satisfaction rose significantly, The Independent reports. The government-owned line also turned a healthy profit, returning around £200m a year to the Treasury.

Yet the line was handed back to the private sector in 2015, when an eight-year contract was taken up by Virgin Trains - only to be cancelled in 2018, after the company ran into money problems.

Workers’ rights

The Institute of Employment Rights think-tank says that privatisation “leads to increased exploitation of workers”, and has facilitated the rise of zero-hours contracts, a “deliberately weakened labour force”, and a significant reduction in assurances of “minimum wage, redundancy pay and access to justice for all”.

“The government is cutting the cost of public service provision before passing it over to private providers,” the institute says. “So the axe is coming down on employee pay, conditions and contracts. Wages and job security are being slashed.”

Natural monopoly

Some industries that have been privatised become so-called natural monopolies, whereby entry into the market is so costly that nobody can compete against the first firm that took control.

For example, privatising the water sector negates the oft-cited theory that privatisation drives innovation and lowers costs, because the creation of a network of separate water pipes that can compete with the owner of the pipes originally handed over from the public sector would be prohibitively expensive.

“A private natural monopoly could easily exploit its monopoly power and set higher prices to consumers,” says the Economics Help site. “Government ownership of a natural monopoly prevents this exploitation of monopoly power.”

Cost-cutting

Proponents of privatisation claim that allowing the free market to influence industry drives innovation and improved service, as private firms typically have more operational and financial flexibility than supposedly bureaucratic government-controlled entities.

However, this is not always the case. In 1997, control of maintenance of the physical infrastructure of the railways - including tracks, signals, bridges and tunnels - was handed over by the government to Railtrack, a group of private firms.

CityLab reports that by 1999, 38 people had been killed and more than 600 injured in two major crashes on the Great Western Main Line, while a third major crash in 2000 in the town of Hatfield killed four more. Faulty tracks or points as a result of poor maintenance and cost-cutting were cited as a contributory factor for all of the accidents.

In 2002, shortly after the infrastructure was renationalised, a government report said that Railtrack’s decision to dole out the different areas of maintenance to its “incredibly complex web of contractors” had led to frequent miscommunications between the firms that made up Railtrack.

The report added that “the pressure to cut costs has been immense”, which had lead to Railtrack “skimping on direct spending” and becoming “more worried about checking paperwork than the actual work being done”.

Cons

Inefficiency

The perceived inefficiency of the public sector is by far the most common complaint made about nationalisation.

Economics Online suggests that in the past, many operators and managers of publicly owned utilities were not “required to meet any efficiency objectives set by the state”, and that “because these industries were protected from competition, they had become increasingly inefficient”.

Bloomberg’s Alex Morales and Charlotte Ryan write that “history has taught us that nationalised industries are costly and inefficient” while also placing a “massive burden on taxpayers as they will require a huge amount of state support and typically provide terrible services”.

Indeed, “the bill for buying back the mail, rail, water and energy industries would be dwarfed by the cost of state inefficiency”, adds The Economist.

Government interference

Governments “are not businesses and do not operate on business principles”, so their goals for industry are at odds to the private sector, argues Australia’s centrist Liberal Democrats party.

“Not only do government-owned businesses distort markets, but the money tied up in government-owned businesses would be far more useful in the hands of the taxpayers to whom it actually belongs,” says a statement on the party’s website.

Critics of nationalisation argue that governments are motivated by political pressures rather than sound economic and business sense. An example of this would be a government hiring too many workers for publicly owned firms, boosting employment but increasing the cost to the taxpayer and lowering efficiency. The government might then be reluctant to get rid of the workers because of the negative publicity involved in job losses.

Increased competition

Despite the looming threat of a natural monopoly, proponents of privatisation suggest that, when it occurs alongside deregulation, privatisation allows “more firms to enter the industry and increase the competitiveness of the market”, Economics Help says.

“It is this increase in competition that can be the greatest spur to improvements in efficiency,” the site adds. “For example, there is now more competition in telecoms and distribution of gas and electricity.”

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