Labour's confused plans for nationalising industry

Privatisation, Margaret Thatcher’s flagship domestic policy, is under attack, amid mounting public complaints about energy prices and rail fares, late and cancelled trains and alleged exploitation by rapacious and environmentally irresponsible water companies.

Spotting a potential vote-winner, the Labour Party has hit on an answer: re-nationalisation of swathes of British industry, starting with utilities and the Royal Mail. Despite the cost to the taxpayer, estimated by the Confederation of British Industry as at least £196bn—a figure Labour disputes—opinion polls suggest the party’s pitch enjoys considerable popular support.

However, Labour risks sacrificing the pursuit of sound policy to political opportunism and ideological zeal. There is little evidence that the nature of ownership is, or need be, the critical determinant of corporate performance and a good deal to suggest that, in Britain at least, nationalised industries delivered poor service and value for money in the past.

Few people aged over 60 recall fondly the days when state-owned British Rail operated dirty, unpunctual and crowded trains and the Post Office could take months to install telephones and charged high tariffs for all but local calls. Strikes were regular events, while sustained investment was hampered by the Treasury’s mistreatment of nationalised industries as macro-economic policy tools and piggy banks to be raided to fill holes in the public finances.

Nor do modern day examples support the notion of “public ownership good, private ownership bad.” In France, the cradle of statism in Europe, privately-owned water companies have been around since the mid-19th century and today supply three quarters of the country’s water. There is public grumbling about charges, but no popular clamour for the companies’ nationalisation.

Conversely, 18 of Britain’s 23 rail operators are wholly or partly owned by state-owned foreign companies, whose operations in their own countries are often held up as models by critics of Britain’s train services. Whether or not they do actually perform better—exact comparisons are difficult and depend heavily on how performance is measured—the critics’ arguments appear inconsistent, if not self-contradictory.

In truth, the quality of public services is determined far less by ownership models than by regulation. This was a field in which Britain led the world in the 1980s, pioneering systems for overseeing newly-privatised utilities that were widely studied and emulated by other countries, including the US.

Britain’s regulatory agencies are independent of government, being accountable to parliament, not to Whitehall. They are invested with a mandate to maximise competition and with considerable powers, of which the strongest is the right to refer recalcitrant companies for investigation by the Competition Commission.

By and large, they have done a reasonable job in sectors with low barriers to entry, such as telecommunications, where they have struck a fair balance between championing consumers and encouraging investment. Their record in dealing with natural monopolies, which are sheltered from market forces, has been more mixed, however.

The water industry, and Thames Water in particular, is a favourite target of criticism. The company has been widely accused of concentrating too much on profits to management and investors while undertaking potentially wasteful investment, ramping up charges and damaging the environment, behind an opaque ownership structure that has enabled its controlling offshore shareholders to avoid public scrutiny and accountability.

If ever there was a case for public ownership of a utility, this would seem to be it. Yet few privatised water companies elsewhere stand accused of the same failings as Thames. Indeed, World Bank studies have found that in many developing countries, private ownership has led to improved efficiency, access to water supplies and environmental and health standards. Though tariffs have risen, the Bank found no evidence of profiteering.

Here again, the key is not ownership, but regulation. Yet instead of seeking ways to strengthen Britain’s independent regulatory agencies, the Labour Party proposes to transfer all or many of the functions of those overseeing the utilities it plans to nationalise to new bodies, charged with a far wider range of responsibilities including ownership of infrastructure, enforcing environmental standards and strategic planning. This would all be part of what the party calls a system of democratic public ownership, in which trades unions, employees, consumers, local and regional communities and unspecified “multi-stakeholder processes” would all be consulted on and participate in decision-making by nationalised utilities.

Labour claims that would ensure that the companies were no longer beholden to commercial goals or able to “game the system” of regulation but instead responded to the broader needs and demands of society at large. That, however, looks like a utopian vision. It implicitly assumes that so many diverse interest groups have priorities that are similar or can be easily reconciled, when in reality they differ widely and often conflict. It is not obvious, for instance, that trades unions’ efforts to raise their members’ pay are compatible with the interest of consumers and local governments in keeping tariffs low.

One of the strengths of Britain’s independent regulators, at their best, is that legal separation from both government and the companies they police enables them to stand aside from and balance all those varying interests. Indeed, the National Infrastructure Commission argues in a recent report that the trade-offs the regulators make would still be necessary if the industries they oversee were publicly owned.

It is unclear how well that would be achieved by Labour’s democratic public ownership model, which has echoes of policies championed in the 1970s by Tony Benn, the radical former Labour politician. The result might easily be a confusing free-for-all, in which the more powerful interest groups would prevail over the weaker ones. Holding the ring between them and formulating coherent corporate strategies could be a complex task.

Britain’s regulatory system is not perfect and would undoubtedly benefit from reforms to remedy its weaknesses. However, Labour has chosen a far more radical, complex and costly alternative that is based on questionable analysis and appears to be influenced as much by dogma, populism and a social policy agenda as by a genuine quest for optimal economic outcomes. The forthcoming election will decide whether the party has the chance to put its plans into effect and whether they live up to public expectations.