Nationalisation: the pros, the cons and the alternatives

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Nationalisation

The pros and cons of bringing certain businesses under state control have been discussed for decades – and the debate is topical in the UK again, owing to the public’s growing dissatisfaction with key services. Dan Lewis, the IoD’s former senior adviser on infrastructure policy, assesses the potential effects of nationalisation on three industries and considers the alternatives

There are no new ideas in politics. Before the 1959 general election the IoD published Mind Your Own Business, a pamphlet listing 400 firms deemed to be at risk of nationalisation. Since then there have been waves of nationalisation and then privatisation. Today we seem to have come full circle, with the debate again proving divisive.

The pro-nationalisation arguments vary by industry, but they boil down to one main concern: that money which could be reinvested in improving public services is diverted away to dividends and boardroom rewards. On the other hand, privatisation has enabled firms to access extra capital, achieve efficiencies and improve services.

We asked 750 IoD members for their views on three public services: rail, water and energy. In each case, those who agreed that nationalisation would improve matters were in the minority (see graph, right). But it was clear from their responses that there is scope for improvement. The key question is whether the huge effort and disruption of nationalisation would produce better results, or whether we can instead do more to unleash the power of private-sector competition. Let’s take a closer look.

The railways

Perhaps the most obvious target for nationalisation, a number of train operating companies (Tocs) and Network Rail hit the headlines in recent months for their chaotic timetable changes. Yet there were 1.7 billion passenger journeys in 2017-18, compared with only about 700 million a year before British Rail’s privatisation in 1994.

Our rail system is half-nationalised. When BR was sold, the infrastructure was entrusted to a private venture, Railtrack, with the Tocs bidding to provide passenger services. After Railtrack collapsed in 2002 with debts of £3.5 billion, the state-owned Network Rail took over. But the financial problems have only grown: Network Rail is running with debts of £51.2 billion, according to its latest annual accounts.

The Tocs, meanwhile, have little flexibility. The Department for Transport stipulates the service they must provide in great detail, down to how many trains must call at which stations. It has also been argued that the franchise system leads to over-bidding, which in extreme cases has forced Tocs to abandon their franchises. National Express did this during the 2009 recession when passenger numbers on the East Coast Main Line did not increase as budgeted and it wasn’t permitted to adjust its contract accordingly. The state-owned “operator of last resort” that replaced it, East Coast, returned £1 billion to the public purse in its five years of operation, but did so under a different contract, allowing it to reduce services and so cut its costs.

Water

Ten English and Welsh water authorities became private firms in 1989-91, alongside the creation of Ofwat, the regulator responsible for licensing suppliers, setting tariffs and enforcing standards. Since April 2017 businesses in England have been able to switch suppliers. Most IoD members we asked about this in our survey were unaware of the fact.

Water UK, which represents the main suppliers, commissioned research last year that suggested productivity in the industry had increased by an average of 2.1 per cent a year between 1994 and 2017, although the improvement was faster in the years immediately after privatisation. Water UK also reports that the quality of drinking water has improved, as measured by average compliance with UK and EU standards, and so has the quality of river water. The National Audit Office estimates that £126 billion has been invested in water since privatisation.

Water provision varies across the UK. Scotland and Northern Ireland have a single publicly run supplier for households, while Wales has a mixture of for-profit and not-for-profit providers. There is no compelling evidence that state-owned providers perform better. Scottish Water has got closer to the performance of its equivalents south of the border – partly because the Water Industry Commission for Scotland had benchmarked it against them to drive improvements. There is still an efficiency gap of about 13 per cent between Northern Ireland Water and the best companies in the rest of the UK.

Energy

To give a simple description of the energy industry, National Grid delivers electricity and gas over long distances and then distribution network operators (DNOs) bring it into our homes and businesses. Both are regulated by Ofgem. The transmission and distribution of energy accounts for about one-third of our final energy bills.

The DNOs are regulated regional monopolies that operate in an increasingly cutthroat environment for energy suppliers, in which customers can choose from more than 70 companies. In the near future, they will have to manage the emergence of the so-called smart grid, where energy consumers can be producers as well. The DNOs have also been leading the charge in connecting more than 28GW of distribution-level generation sources, ranging from wind farms to small-scale solar arrays, to the grid since 2007.

A truly smart grid, where digital tech provides real-time consumption data, will improve efficiency and reduce costs. This is private-sector led innovation – and there is little reason to think that further state intervention would produce better results than what’s already being achieved.

The alternatives

Arguing against nationalisation is not to dismiss the need for reform. Accelerating the roll- out of digital signalling on the railways would significantly increase their capacity and improve reliability, for instance. This is proven tech, which has increased Tube capacity on the Victoria Line by 29 per cent, making it the world’s second-most frequent metro service at 36 trains an hour. Real- time pricing on trains, potentially using third-party app developers, could also influence more passengers to travel during quieter, cheaper periods. Consumers are already used to this idea in the taxi market.

In the water industry, one bold option would be to introduce full retail competition, so households could switch suppliers just as they do for electricity and gas. There are also more basic steps, such as incentivising the 50 per cent of British households that don’t have a water meter to obtain one by offering lower tariffs, thereby helping to manage the UK’s growing water consumption.

This is just a flavour of how to improve these public services without resorting to nationalisation. Karl Marx argued that all historical events occur twice – the first time as tragedy, the second as farce. We’ll leave you to judge whether we’re now watching a farce play out, but one thing is certain: this show isn’t over yet.

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About author

Dan Lewis

Dan Lewis

Dan Lewis has been working with the IoD since 2011 on Energy Policy. Since March 2014, his brief has been expanded more broadly to include Infrastructure. Incorporating energy as well as roads, railways, airports, ports, utilities, telecommunications, flood defences, waste and local amenities. His role is to meet and engage with the business community on infrastructure and energy issues, develop and write policy papers and contribute to the media on behalf of the IoD.

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