Why OH WHY did Blighty privatise EVERYTHING?

Rampant free marketeer 'not actually mad'

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Worstall @ the Weekend Given that I'm a Senior Fellow At the Adam Smith Institute and we pretty much invented – at least in the British political sense – the idea of privatisation, I've responded this week to an interesting request from the commentards as to why in the hell we did this.

Especially since some of the best run privatised firms now seem to be run by foreign state-owned companies. There's clearly something more than just the dead hand of state ownership at play here.

And there is indeed more than just that dead hand. To start with what everyone was told: state-owned companies don't care about profits, caring about profits is what makes companies, their products and services, better, so privatise the companies and see them get better at providing stuff.

This is really a lies-to-children explanation of the Sir Pterry type.

Quite apart from anything else it's not the pursuit of profit that makes organisations more efficient: it's the prospect of having whatever profits you might be able to make competed away leading to the death of the organisation that does. It is thus markets that promote efficiency in the economy, not profit seeking itself. That someone can come in and compete.

This then leads to an argument that state-backed companies should be sold: for when the state owns one player in a nominally free market, that state that also writes the regulations about who can do what, we're not likely to get all that competitive a market.

Around here, people complain enough about BT and the way that it controls far too much of the nation's copper cable and broadband infrastructure. Now think what it would be like if the state itself, those regulators, were sharing in the profits from not beating BT up on competitive access.

Quite.

So, to get to those competitive markets we'd like all the players to be private sector actors. Thus, the regulators can at least have an opportunity to be impartial. So therefore sell off the state-owned companies.

There are arguments against this as well. One that used to be rolled out was about the water companies. They're obviously natural monopolies so we're not going to get much competition. And government should, in theory at least, be better placed to work out what is the optimal level of investment in such monopolies. Not least because there are externalities (things like the environmental quality of river water, etc) that markets don't deal with well.

However, showing that there could be a market failure isn't the same as the statement that government action or ownership solves that problem. As we found out a decade after the water privatisations when OfWat took a look back at those 10 years.

The basic structure was that England got fully private, profit seeking, regional monopolies for water. Wales got a slightly odd mutual owned by the Great and the Good. Scotland was handed a state-owned company and, in Northern Ireland, it was left to the local councils to get on with it as they always had, directly.

A decade after privatisation, OfWat looked at four measures. How much lower were prices (as against general inflation, of course), how much had the water quality in the taps gone up, how much success was there in dealing with leaky pipes, and how much had the environmental quality of the natural water systems risen (this is essentially the same as asking how much better were the sewage services).

On all four measures things had changed. But those different systems had produced different amounts of change in each. And on all four measures England had improved the most, Wales second, Scotland third with NI bringing up the rear.

So, this idea that profit-making companies will improve service, even in the absence of competition, does have something going for it. And then there's that idea that government will divine the optimal investment amount because of those externalities and thus ensure that that is the amount invested.

Except investment went up substantially after privatisation. For while the theory tells us that government could spend the optimal societal amount, it didn't. Whitehall hated investing in anything as this added to public debt (yes, the debts, even for investment, of a publicly-owned company is public debt) and it just loved the ability to skim off the monopoly profits to pay for other stuff government does.

So, having the water companies as a government monopoly actually led government to exploit that monopoly: under-invest and skim off the profits. Having them as private companies allowed government to set tough regulatory targets without being flustered by those financial issues.

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