Did privatisation deliver the goods?

Burst water main © Rex Features
There was a gusher for shareholders too

Since the Thatcher revolution, most of Britain’s publicly owned utilities have been sold off. How did that work out? Alex Rankine reports.

Who owns Britain’s utilities?

Most of Britain’s publicly owned utilities were sold into the private sector during the 1980s and early 1990s, starting with British Telecommunications in 1984 and ending with the sale of the railways under John Major’s government. Today, the bulk of utilities remain in private ownership, including the “big six” energy companies – which together account for roughly 90% of the energy retail market – and 17 private water providers, although Scotland and Northern Ireland have retained publicly owned water companies.

A curious feature of Britain’s privatisation story is that even as the British state has stepped back from owning infrastructure, foreign firms and even governments have moved in, including energy supplier EDF Energy (a subsidiary of the national French power company) and the new South West Trains franchisee First MTR (which is partly owned by the Hong Kong government). Altogether, an Office of Fair Trading report in 2010 estimated that more than a third of the UK’s infrastructure is under foreign ownership.

Was privatisation a success?

The question is highly contested. Many who remember the quality of service dished out by the old state monopolies, such as British Rail, will acknowledge that the nationalised industries left much to be desired. In some sectors it seems reasonably clear that privatisation has brought gains for consumers.

British Telecommunications could take six months to install a new phone line before privatisation and was once called the “most hated institution in the land”. Today, BT promises to install new lines within 15 days and has successfully shifted focus from the old landline business to providing the modern technologies of broadband and mobile data to consumers.

What do critics say?

That privatisation seems to have generated big profits for shareholders even as prices for consumers rise. Recent energy-price hikes might at a stretch be blamed on commodity price volatility, but even the price of something as basic as water has risen by 40% above inflation since privatisation in England and Wales. A University of Greenwich study this year estimated that privatisation costs each household in England an extra £100 per year in higher water bills.

More spectacularly, the failure of Railtrack in 2002 led the UK government to take back ownership of the railway infrastructure, even as franchise operators remain private. Even so, the government subsidises the railways, pouring in £3.8bn in 2015/2016. In 2011 the independent McNulty report into the UK rail industry concluded that UK rail costs per passenger per kilometre are as much as 67% higher than comparable European countries, where rail is largely state-owned.

What do the companies say?

Defenders of privatisation point out that the number of rail passengers has more than doubled since rail was sold off, whereas it fell by a third between 1960 and 1995 on British Rail’s watch – although it should be pointed out that similar trends have been seen elsewhere in Europe without privatisation.

Water companies argue that criticism of price hikes overlooks the industry’s strong investment record – with £130bn spent on improving services since 1990. Politicians such as John McDonnell who cite higher water bills since privatisation fail to take more recent developments into account: the average household’s water bill in England and Wales actually fell by 2.6% in real terms between 2009/2010 and 2014/2015.

Where do the profits go?

Even John Major has previously suggested that profit levels at some privatised companies are “excessive”, while a Competition and Markets Authority study last summer found that profit margins at two of the five biggest energy suppliers were as much as “five times too high”.

The energy firms say that high margins are necessary to fund investment in new energy generation capacity, but of course, new investment is not the only destination for companies’ profits. Investors are often told that utility companies offer reliable dividends, and many privatised utility firms devote a significant chunk of their annual earnings towards shareholder payouts.

Who pays the most to shareholders?

On one score, it’s the water industry. Nine of the biggest privatised firms paid out a total of £18.1bn in dividends in the decade to 2016, from a collective post-tax profit of £18.8bn. Three firms paid out more in dividends than they earned in pre-tax profit.

Thames Water paid £100m in dividends in the year to March, even as it came under investigation by the regulator for “unacceptable failure” to control water leakages. The firm has also been criticised for taking on extra debt to minimise tax liabilities and leaving the Treasury to underwrite London’s new £4.2bn “super-sewer”. Still, it’s not clear that we’d get better value under public ownership.

Should we nationalise the lot?

Labour’s election manifesto this year envisaged sweeping nationalisation of the UK’s energy, rail and water utilities. Some suggest the cost would be prohibitive. Yet it would bring an asset of equal value onto the government’s books in return for the cash. The broader issue is whether utilities perform better in the private sector or under state control, and here the evidence is mixed.

State-owned firms can be subject to financial meddling when job losses are at stake, but financing costs are higher for private operators than the government, which can borrow against its ability to raise taxes if the business goes bankrupt.

The real problem is that many utilities are natural monopolies – when Southern Rail cancels a train service, consumers cannot switch to a rival operator. As the economist John Vickers has written, “charging monopoly ownership, in either direction, does not by itself produce magical economic effects”.

  • Good piece. Very even-handed. You tend to find people are either all for privatisation or all against it, but the truth (as always) is more nuanced.

    I think it’s fair to say some privatisations have been successful (BT, BP) some have been okay (water) and some are severely problematic (energy, rail). Even then, the debate on rail privatisation is very often muddied by the largely separate issue of whether rail users or the general taxpayer should be footing most of the bill. Us city folk and commuters tend to underestimate just how many people never travel by train.

    Energy is clearly a problem, though. The need for energy infrastructure spending is dire, but it seems like we’re leaving this up to the companies concerned to a very large extent. Better policing is needed, I feel, and if the companies were better at showing where their profits were being reinvested, the public might get off their backs a bit. We’re clearly being taken for a ride to some extent, though – as a country we’re practically self-sufficient in terms of natural gas, yet we’re paying a price per unit before tax that’s higher than a lot of countries that have no gas reserves at all. That can’t be right.

  • Captain Nemo

    As a lefty, I’m ashamed to admit that before privatisation, British Telecom were a joke. I remember one time I was at Victoria station (pre dumbing down – it’s now called London Victoria) and I couldn’t find a single pay-phone that worked. Why didn’t they work? Because they were all full up with money, waiting to be emptied!

  • smspf

    No.
    Major’s rail privatisation was the single largest government cockup since Thatcher closed the mines. Look to Germany to see how it was done better/properly.