There is no small contingent repeating the mantra "Privatization Is Good" with a religious fervency that would make Lubbovitchers envious. Their arguments - free markets, competition, consumer choice, efficiency - are, by now, well-known to all. But I often wonder whether any such proponents have taken a (UK) train in the past decade, paid a gas bill, tried to swap electricity providers, have ever been employed by a privatized regulated quasi-monopoly, or for that matter, ever required the installation of a private telephone line.
I will state my thesis clearly and directly: upon reflection, I reckon that the overwhelming majority of the much-trumpeted economic benefits have been appropriated by Management and Shareholders of privatized entities, leaving the other constituents - captive customers, and long-serving employees and, most importantly, the taxpayer - decidedly worse-off than what was the case with former monopolies, or what is the case in comparison to state-sponsored monopolies across peer nations in Western Europe. While it is likely that there are many studies sponsored by the beneficiaries demonstrating unmitigated success, in addition to numerical analyses from the losers, concluding overwhelming failure, what IS undisputed is that the "Privatization is Good" arguments have gained primacy amongst the polity to such an extent that it feels heretical to re-open discussions to the contrary.
Let's detail and review the textbook arguments promised in favor. Lower prices. Better service. Greater simplicity. Increased investment in infrastructure. More consumer choice. From my observations on an absolute and relative basis, I anecdotally conclude the following: Lower prices (than otherwise would have prevailed)? No. Better service? Not really, unless one enjoys being tortured by rat-hole mazes of automated telephone menu systems. Greater Simplicity? No, it is likely that to NOT be buggered by the plethora of sucker "deals" and teaser offers, one needs a more advanced degree than the engineers providing the service. Greater Investment in Infrastructure? I will concede 'perhaps in airports'. These are neither indictments against markets nor a trebuchet aimed at the notion of competition. The dismal experience to-date may be the result of insufficient regulation or regulatory failure, corporate lobbying & rent-seeking, or simply ineptitude or short-sightedness on the part of The State in the sale of assets or management of the long-term concession process, which is undeniably complex, and subject to asymmetrical expertise when facing off against better-funded and better remunerated private interests (at least in nations where the most able opt for private rather than public administrative careers). Or it may simply be that exchanging public for private ownership of natural monopolies are just not fit for the purpose of exemplifying Libertarian-inspired policy benefits.
Consider, now, what is self-evident: Capex is likely lower (and now conflictual needing to, as best as possible, be stipulated by contract), and where adequate is typically funded directly by the consumer through higher charges. Yet, the consumer/taxpayer, who regressively pays for the capex and infrastructure receives no long-term benefits such as lower charges once depreciation rolls off, nor carried interest in the resulting long-lifed assets whose (monopoly) values have tended to rise at greater than the rate of inflation. Consumer costs are by definition higher since they must now directly repay the up-front dowry investors forked over in exchange for a guaranteed rate of return. Here, again, incentives are conflictual as prices are rapid to rise and sticky to fall. Moreover, non-volatile non-commodity things like transport or water/sewage NEVER fluctuate down (on an average basis).
Risks also appear skewed asymmetrically-favoring shareholders at the expense of the Taxpayer and Consumers. The risk is fully-borne by the consumer. Price increases typically have a guaranteed floor with a minimum (again in the case of trains) guaranteed escalation of "CPI + 1" formula with options for more upside should regulators be strong-armed or feel charitable, or wages be strong-armed or fortuitously move lower in real-terms. And in fact, wages and benefits for most employees have been doing just this: falling in real terms, irrespective that the contractual basis for perpetual increases on the revenue-side of the equation is CPI. This is unimaginably good luck since CPI is unreflective of their costs - rising residential property prices, rents, food and - in a perverse feedback loop - the higher rail and utility charges themselves. Over time, this runaway feedback-loop has left (for example) UK fares ridiculously out on the tail of comparative European costs.
"Consumer choice" is one of the favourite arguments of proponents, yet also one of the lamest - particularly when applied to the typical privatized monopoly. Supporters may conjure images of the dour Leonid Brezhnev, a cigar-chomping Fidel or an army-fatigue clad Bulgarian women in Ceaușescu-like Halls of The People hissing and spitting in customer's faces. But I believe this is a canard, and that there is, to put it frankly, little public utility in competing utilities - from a customer choice point of view. Competing oligopolies can hardly be considered to provide truly competitive choice. Can anyone honestly say that privatization has improved customer service? I see no end to understaffed gas, telecom, or electric works snarling critical byways, workers unchaffed, sipping tea. One can wonder whether public monoplies might have provided even greater benefits had they the luxury of the productivity gains resulting from IT revolution just as one may wonder whether the Average Russian, as opposed to the 135 oligarchs controlling 40% of Russia's wealth, would have been better off had The Party remained in power, or a newly democratic state had maintained monopoly control of assets at least through the main part of The Commodity Supercycle. If legacy monopolies were empowered to invest half the resources that newly-privatized entities spend concocting deceptive half-baked fare structures or confusing tariff-schemes with weird-ass terms in which the consumer always loses, "customer choice"would be a proverbial red herring. Gas would be delivered; waste-water cleansed and it would be done simply and sufficiently above cost to fund capex for the next generation. It truly isn't difficult. And in any event, customers do NOT want choice - they want what they want, which is good value for money - rather than a jolly-rogering from one's service provider.
Yet another vastly inflated argument is the 'Benefits of Competition' justification. One needn't be a Trotsky-ite to see the paradoxical oxymoronic absurdity of "monopoly competition"- particularly with respect to a natural monopoly. It is all well-and-good to suggest that a bus, car, bicycle, or private helicopter serve as reasonable substitutes for a suburban commute from the Green Belt keeping operators honest, but this is just horse-shit. While the Southern or Southeastern train service may be 35 minutes to a London from my mainline station, a bus (or several pairs of buses) is not (and has never been) a viable substitute and would, in actual, fact take several hours, as might a car journey at the same time in the AM, or PM, forgetting the negative externalities and near-impossibility of parking. As a keen cyclist, I would happily contemplate cycling the 25 miles were it not perpetually life-threatening (even Tour de France-winner Brad Wiggins was knocked off his saddle in the UK) and were the roads properly maintained. I would hitch a ride on Lord Asa Three-Names' chopper were it on offer and make my own way across town, (though sadly I've yet to be invited). And while my garden is of sufficient size to house an Aggreko generator should my Electricity provider fall out of my favour, the resulting vibrations and humming might sour neighborly relations just a tad, and while I am fortunate to also have space for a diesel storage depo, I do have my doubts whether the requisite permits would be forthcoming. Let's stop the weaseling: it is a bullshit of an excuse. There is a simple blended cost of production (raw material plus large depreciating capital costs), delivery across a network (also with maintenance, & high and depreciating capex) plus the SG&A of billing & admin (and perhaps the cost of placing one's name on a Premiership jersey. Tweedle Dee's price cannot be more than basis points from Tweedle Dum (nor his logo more inspiring). If it is then (1) Tweedle Dee is stealing from us all, or (2) Tweedle Dum is completely inept and has wasted valuable resources that could have been used to contribute to ongoing system-wide capex. Oh and of course there is not an improbable chance that: (3) Tweedle Dee and Tweedle Dum collude on pricing and both steal from us all.
Ah, one might interject, The Taxpayers are surely better off. After all, they received generous proceeds from the sales, didn't they? Apart from a lower borrowing requirement and some freebies, I don't see where the Taxpayer is better off. Privatisation was always about fiscal diddling and the last round by New Labour were no different as I called out here and here (should anyone think me partisan) and were little different to American's taking out HELOCs on overvalued homes to take a cruise, or make other non-investment-related expenditure that shredded any hope of retaining equity on their home. More importantly, for fiscal rectitudists, they prevented UK politicians from having the type of adult conversation with their child-like Constituents about sustainable spending (which BTW includes the very same public servants' pensions!!). The point is, the state needn't ever bear the brunt of capital investment (directly on-balance-sheet) since a state-controlled natural monopoly can borrow and invest in its own name, even without an explicit government guarantee. This is strictly off-balance sheet. A typical natural monopoly's assets are vast, and rarely are it's claims-paying ability in question (with a few exceptions e.g. USPS) where ostrich-like union intransigence fails to acknowledge the arrival of the twenty-first century upon jobs, service and working practices. One could argue that it in certain situations, such a monopoly borrowing in its own name is preferred by investors since it's assets (a Gas distribution network, rollingstock, a power grid) are typically less encumbered than a Govt's G.O. promises - DB, SNCF being a case in point. Who wouldn't lend to Deutschebahn or SBB? Moreover, it needn't be Leviathan, or a Michael Palin-inspired "Brazil" bureaucracy. DB (as well as others on the continent) is organized as a private corporation, run on corporate lines, where the shareholders have broader, wider objectives (like "let's not make it a priority to think of devious ways to fuck our customers) and more importantly, being in a position to exercise the requisite control to make it so. Taxpayers get short-shrift in other ways. Since newly privatized firms notoriously drive down real wages and benefits, there is a greater burden on the social services and government expenditure - both directly and indirectly. And there are the negative externalities that come with outsourcing and greater employment instability - either through the increased rate of contract workers, or outsourced contract workers. Were waste and largesse pursued in the name of the customer to reduce prices, or with a view to investing the gains in new plant, equipment, better services etc. this could be a powerful argument. Instead these gains are pocketed primarily by management and shareholders - a net transfer from workers, captive customers and taxpayers to management and shareholders, aptly characterized by Billie Holiday in her signature tune: "Nice work if you can get it....", or if you're allowed to get it.
Not only are taxpayers NOT better off, they likely are worse off. They are being abused by clever financial engineering (like the type the Li Ka-Shing used to control Thames water) which after years of minting coin and contributing to the HMRC miraculously no longer makes any trading profit on-shore and therefore pays no income tax as a result of inflated interest payments to foreign debt-holders (who are, Yes!, Li Ka-Shing). By selling up, the taxpayer has ceded a most valuable inflation option on precisely the type of inflation we are witnessing and are likely to continue to witness: Stagflating Resource Stuff coupled with falling real wages resulting from dual pressures of globalization and persistent output gaps. For IF real median wages are falling (and they are), why don't the customers share the benefit? Why should management and shareholders receive this windfall? Surely this wasn't the spirit of privatization. The option is asymmetric: a guaranteed rate of return on the downside and asymmetric embedded options everywhere else. Investors (and management) are long a free-call on stagflation, and inflation, and long a put on deflation via return guarantees on the downside. The Taxpayer, through privatization, managed to go short perpetual, free straddles!! Both Employees and customers are short the same inflation put. The State (and hence Taxpayers) got a right shite deal because they swapped an asset - i.e. hugely valuable infrastructure and monopoly privilege whose Tobin Q-ratio (as HS2 and Cross-rail show) is many many many times higher that that implied by the typical sale price - for cash which was effectively a one off reduction in taxes/revenue.
Holding one of the winning tickets are management & directors, who receive far-higher salaries for doing the same thing they were doing before, with the added bonus of golden parachutes and additional benefits previously "not cricket" with being the manager of an enterprise in "the public interest". Before one judges harshly, this might be warranted given the reduced job-security and icnreased stress now associated with a private enterprise. Ummm but wait: wasn't the same argument used to throttle employee wages, and outsource their (better-paying) jobs? There is no less fierce or heated competition for management's jobs as there are for labour's, yet the outcomes are decidedly different, and neither is in the public's interest. Combined with Shareholders spoils, the gains are now wholly-privatised, with the attendant risks - including unemployment, and tax-predation, fully-socialized. Cost rises and capex are borne ultimately by the consumer without recompense; employees are left with even less stability, fewer benefits and falling real wages; while at the same time salaries and benefits for management outpace inflation. Add to that the injustice of free embedded options awarded to management and particularly shareholders, to the insult of consumers having to endure collusion amongst so-called competitors, more complex and deceptive pricing and attendant stickiness in prices that borders on cheating & dishonesty, and it's hard to get very enthusiastic about the whole exercise.
At least, for the economy as a whole, whatever the drawbacks of Bulgarian-inspired customer service, 1980's 'GUM'-style choice in Public Utilities, the patronage, sloth, over-staffing, higher-than necessary employee wages and benefits - whether imagined or real - likely made positiver contributions to the stability to macroeconomic 'Consumption', contributed to reducing both the level and the cyclicality of 'Government' expenditure, reduced the stress and uncertainty amongst workers generally thus contributing to marginally higher consumer spending, and investment since the velocity and marginal propensity to consume the additional pound are more elevated when distributed throughout the median income household and below.
So the next time your ideologically-driven MP tries to convince you of the benefits of privatizing your natural monopoly, remember that, adapting Frank Zappa's apt words, there is a big difference between kneeling down before the altar of privatization and bending over.