How much public ownership is in the public interest?

The story of the privatisation of the former state monopolies is a fascinating one. The sectors taken into public ownership by Clement Attlee’s Government in the late 1940s were all natural monopolies and included gas, electricity, water, the railways, and coal. The theory behind the nationalisation of these industries was a mixture of political principle (rare) and political expediency (widespread). The Labour Government did not have the faintest idea what to do with them once it had taken them over.

These industries were formed into huge monolithic corporations with the management answerable to Parliament for performance. We need to note that the main task in building up any industry is the accumulation of capital equipment. This task had already been accomplished in the utilities and all that remained was to operate the equipment to generate the various products and services – a reasonably straightforward job. The power stations, reservoirs, gas works, telephone exchanges and so on were all in place. The hard work of capital formation had been completed. Thereafter, it was just a matter of ensuring that additional capacity was brought in to meet increased demand.

Not surprisingly, these public utility corporations continued to be managed on a day-to-day basis by the same engineers and accountants as before. Also, and to no one’s surprise, the nationalised utilities all experienced from their respective vesting days a startling growth in managerial bureaucracy.

This state of affairs drifted on for the next 30 years or so – that is, from the late 1940s to the election of Margaret Thatcher’s Government in 1979. The performance of the nationalised industries varied from poor to abysmal during those 30 years. The miners maintained their spirited tradition of aggressive trade unionism but the consequence of this was a marked improvement in their reward packages rather than significant interruptions in the supply of coal – at least until the arrival of Arthur Scargill. Their example was copied by the other nationalised sectors to greater or lesser degrees, and the outcome was an increasing burden on the taxpayer rather than failing supplies.

A key point about this 30-year phase was a general improvement in the cushiness of the managers’ jobs right across the sectors – both in terms of job demand and, to a lesser degree, in terms of job rewards. Other general developments in the sectors included a significant rise in the number of managers and, especially, of senior managers. Unkind souls might describe this as over-manning and I am one such unkind soul. The combination of these factors resulted in year-on-year deficits with the taxpayer footing the bill. This was possibly the start of the double whammy syndrome in which the private sector saw its own terms and conditions decline in relative terms while its taxes rose to fund the deficits of the nationalised industries.

The same people who managed industries before nationalisation continued to do so after it, and presided over the appalling performance decline. Collectively, they took the line of least resistance, made token protests about this or that abuse of trade union power, but effectively abdicated their responsibilities throughout. We have also noted the cushiness of managerial jobs in this sector at that time showed a low and reducing level of job demand coupled with relatively modest reward packages. To use a phrase borrowed from the Eastern Bloc economies, the managers pretended to work and the Government pretended to pay them.

All this changed with the arrival in Number 10 Downing Street of Margaret Thatcher in 1979. She had observed what was going on in the nationalised industry sector and she had not liked what she had seen. Accordingly, she launched among other policies a determined assault on trade union monopoly power coupled with an equally determined plan to return the nationalised industries to private ownership. She won both fights by knockouts. A timetable for the return of the nationalised industries to private ownership was drawn up and pushed through. These newly privatised industries continued to be managed by the same people who had managed them in their previous life. What happened next is crucial in any study of the cushy number. Quite simply, one consequence of the sell offs was that the new managers (in other words, the old managers) became enormously rich by restyling themselves chief executives or whatever and applying the most favourable comparisons available to them from the private sector.

It can be argued that things did get better and performance did improve, and, most significantly, the requirement for huge annual subsidies from the taxpayer to bridge the gap between income and expenditure ended – at least in most cases.

And things did get better by means of just one highly effective expedient. A huge cost item for most of the privatised industries was the wage bill. The managers solved the massive over-manning problems which they themselves had created, and then transferred significant amounts of the employment costs thus saved to their reward packages.

These managerial cocked things up on an Olympian scale and then, given intestinal fortitude and anti-union legislation by the Iron Lady, partially corrected their own failures by dint of a one-off productivity improvement, and become rich beyond the dreams of avarice.

The first to hit the headlines as a fat cat in the privatised utilities was Cedric Brown, the chairman of British Gas. His name has now faded into memory but he became briefly unpopular in the late 1980s when his generosity to himself raised eyebrows and then ire in the City pages. His example swiftly became the norm in this managerial paradise. Where Cedric led, others followed. It was at this time that the term “fat cat” assumed common parlance.

There were frequent complaints in the media about the greed shown by the managers in this sector. In 1991, a letter in the Daily Telegraph from one Roland Rench spoke feelingly about “the blatant exploitation of the private monopoly position which the public is powerless to prevent”. True then and equally true today.

In the mid-1990s, Simon Jenkins and Andrew Neil used their columns in The Times and Sunday Times respectively to lambast the greed of the bosses of the privatised utilities, buy to no effect. The excesses (as defined by Neil and Jenkins) have continued to this day. In vain, did Simon Jenkins declare: “It is abundantly clear that the people running what are still regulated utilities have spent the past five years paying themselves as much as they dare”. In vain did Andrew Neil fulminate against “the unrestrained greed of the few, which has cast a dark pall over privatisation”.

Both noted that these nouveau riches were conveniently free from tiresome commercial competition and of any effective shareholder control of their activities.

Columnists, commentators and pundits sought in vain for mechanisms to curb these excesses. One solution, which always appeared to lack bite, was that shareholders in these companies should exercise control over boardroom excesses. Broadsheet editorials talked loftily of the need for shareholders to exercise their responsibilities and to combine to mitigate and moderate these excesses. I noted at the time that I would gladly face an annual meeting composed of 500 Jeremy Paxmans and 500 Bernard Mannings, all baying for my blood, in return for the fat cat rewards typically on offer.

One aspect in particular of the fat cat phenomenon particularly upset people. It is the fact that, in the main, this group chose to follow careers in the old nationalised industries precisely because of the high degree of job security. They opted at the outset for modest reward packages in return for low-demand, very secure jobs. They ended up with reward packages at the level of King Midas. The ardent apostles of free enterprise, which is based on the premise that high rewards are the consequence of high demand and a readiness to take risks, were collectively furious.

For my part, the only marginal resentment I feel is when I see this former group described as managers. I recall the comment of Bernard Manning, when hearing a fellow artist say it was hard work being a comedian. “How would you know?”

Can you picture the scene at a board meeting of a privatised monopoly? The first and most important task is to finalise the remuneration of the directors for the next accounting period. The updated reward packages of Roman Abramovitch, Bill Gates and Her Majesty the Queen will be tabled and reviewed, and the gaps noted and regretted. The meeting will then finalise a plan to close these gaps as quickly as is politically possible. With this core task accomplished, the second job is to re-adjust the price of the commodity in order to fund the package increases. The third task will be to sort out a plan to cajole, persuade and bamboozle the regulator into nodding through the price increases required.

The one issue never considered because it never arises is whether the customers will pay. They will pay because they have no choice. Governments have effectively thrown dust in the eyes of voters by seeming to bring in an element of competition. All nonsense, of course. Why bother with a regulator, if we have genuine competition?

Things have not changed significantly since privatisation. In Britain, energy users are still supplied by what is, in effect, a cartel. Those who manage the business arrangements within the energy cartel pay lip service to the regulator, but their business practices follow time-honoured methods to throw dust in the eyes of the regulator – assuming that his or her eyes are actually open. Prices charged rise with startling alacrity following any upward movement in their own raw material costs (and sometimes in anticipation of them). Any downward movement in the price of oil takes an eternity to bring about a fall in domestic energy prices with well-trained public relations people available as required to confuse and enrage customers.

We should not leave this treasure island without a brief word about the railways. Those of us over 60 – there are a lot of us about these days – can vaguely recall a time when the main and linked problems of the railways were over-manning and Jimmy. Knapp, then leader of the RMT rail workers’ union. From time to time, the rail system was halted as Knapp, acting on the instructions of his members and his executive, twisted the arms of British Rail to secure improved pay and conditions. Between these usually brief periods of disruption, the trains broadly ran on time. It was never clear why the privatisation of British Rail took the form it did. We were clear as to why it was privatised but not as to how. The main economic and managerial problem was good old-fashioned over-manning backed by militant trade unionism. Curb the one and the way to solve the other was straightforward. The privatisation model actually used seemed to have been designed in one of the newer business schools on a bad day. Into this theoretical absurdity strode the usual suspects to enrich themselves and infuriate the travelling public. All splendid entertainment – unless you actually need to travel by train – and it has continued to this day.

Hearing and reading about the discomforts and inconveniences triggered by union intransigence and managerial ineptitude endured by the train travelling British public in recent years, one wonders just what it would take to provoke a revolution.

The job demands on those who run the privatised utilities are negligible. There is a total absence of stress because that is why they entered the sector in the first place. Job security is total. Performance measurement is in line with the honourable tradition of the public sector. There is no competition to set performance targets, so you set your own. To no one’s surprise, these are mostly achieved. And then there are the rewards collected by these bosses: huge salaries, huge final salary pensions and huge share options.

All this is relevant to the debate now taking shape, not just within the closed ranks of the Westminster village but also in the wider community.

Jeremy Corbyn risks allowing the strong case to return the utilities to public ownership to founder on the much weaker case to take into public ownership businesses that operate in sectors where competition is real and clearly demonstrable.

The steel sector as one in which public ownership would emphatically not be sensible because the market is served by a significant number of competing global suppliers.

To those who argue that more should be done to curb the greed of sharp practices carried out by some senior private sector bosses, I commend the approach of taxing the reward packages of the recipients at a level that would persuade them to focus on their managerial responsibilities rather than simply siphoning off the very maximum that they can get away with.

The Labour Party should use the time at its disposal to start work now on what might be termed public service models of personal taxation. For those at the greedy end of the spectrum, the Labour Party should not to shy away from measures designed to discourage those whose mission statement is, to quote from Alice in Wonderland: “The more there is of mine, the less there is of yours.”

What other points might be made to support the case for a return to public ownership? In no special order, they include the following.

First, long term electricity supply issues. In my view, there is a strong case to build new nuclear reactors to provide electricity and this case should be examined now. Given the enormous strategic importance of this issue, it is crucial that the decisions arrived at are taken by the state and not by private sector managers and investors interested only in the fastest and largest returns.

Similarly, there is the strong case for the state to invest in the production of fracked products to supply electricity. For my part, I am rather more worried that my grandchildren will freeze to death if there is too much reliance on renewable sources.

Second, on the current ownership of the privatised utilities. The public is vaguely aware that the ownership of the UK utilities is diffuse and to a large extent located off shore. Given the importance of these assets together with the near monopoly business structures that they comprise the case to restore them to the state in the national interest is clearly a strong one. Not many of us would wish to entrust decisions on the future capacity of these enterprises to the international financial community, particularly in view of its abysmal and dubious record of probity in recent years.

Third, the robustness of the arrangements for competition in domestic energy supply needs to be scrutinised as part of any policy review.

Does anyone seriously believe that the market governs energy prices in the United Kingdom? This is a myth, a product of the private sector PR machine.

Let us put the matter plainly. We have here an old-fashioned cartel in which prices are adjusted discretely at levels designed to maximise managerial rewards, with prices slow to fall when oil is in abundant supply and quick to rise when they rise and in which systematic sharp practices are the hidden element in every company mission statement and the key element in their corporate visions.

Fourth, on the case to restore Labour’s Clause IV, the party under its new leader should launch a serious policy review of the complex issues at stake here.

I would oppose any plan to introduce public ownership where it can be demonstrated that effective market forces are in operation. I would go further and urge that there some activities carried in our town halls that are better carried by the private sector starting with the official propaganda sheets which serve to eulogise the performance of their political masters.

Finally, a word on water. I buy my water from Welsh Water and I am given to understand that, following some convoluted changes of ownership, this body is designated as “a not for profit organisation” or “a limited by guarantee organisation. Under this arrangement, there are no distributions of profit, but Labour might review these arrangements in order to check the limits, if any, to managerial reward packages.

To sum up, there is a strong political case to return the privatised utilities to public ownership, and this case should be made within the framework of a disciplined debate rather than via the current flurry of slogans masquerading as voices of reason and experience.

This article first appeared in Tribune Magazine on  September 14, 2015


Author: holdenforth

50 years in management - mostly as a sharp-end man. Occasional contributor to Tribune.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s