How is the privatised utility sector performing?
In a word – badly.
Holdenforth would like to inform our readers about the many failures across the sector, how these problems have arisen and what should be done to improve the situation.
A brief stroll down memory lane.
Some 20 years ago – before the arrival on the scene of Holdenforth – I wrote a book which I called A Cushy Number. It had long seemed to me that there were significant differences between the facts about employment and the all-pervading myths about employment and I opted to explore the subject in some depth.
Let me set the scene with a brief extract from the book.
“Let us begin our analysis with some definitions. We will define a cushy number as a well rewarded sinecure. The word sinecure is defined as an office of profit with no duties. We are looking for a lot more than an office of profit, although we are quite happy with the absence of duties. We are looking for, indeed we insist upon, a job which combines the minimum of effort with the maximum of reward. It must be stressed at the outset that we cushy number seekers insist on having both criteria satisfied. We don’t want a demanding well rewarded job although we accept that this would be a step in the right direction. Equally we don’t just want a sinecure. We want a well rewarded sinecure.”
I proceeded to set up a cushy number model which enabled me to examine the facts behind the fantasies as to who did what and who got what for performing their professional duties.
I also established a league table of cushiness for some 20 professions.
- At the bottom of the league there languished Engineers
- At the top of the league table were the senior managers in the newly privatised utilities.
What had I to say about those at the top of the cushy number league table?
The story of the privatised state monopoly businesses is one not to be missed by the student of the history of the cushy number. The first item of good news is that many jobs in this area are the ultimate cushy number. The bad news is that many of the jobs have gone.
The businesses which we will now consider were all taken into public ownership by the Attlee Government in the late 1940’s. They were all natural monopolies and included Gas, Electricity, Water, the Railways, and Coal. The Labour Government did not have well thought out plans about what to do with them once they 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 utility sector is the (often painful) 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 coal mines, power stations, reservoirs, gas works, telephone exchanges, railway lines 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 1940’s to the election of the Thatcher Government in 1979. The performance of the nationalised industries varied from the poor to the abysmal during these thirty 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 to the taxpayer rather than failing supplies.
One key point to note with reference to the years from 1950 to 1990 was a general improvement in the cushiness of the managers’ jobs right across the sector both in terms of job demand and, to a lesser degree, in terms of job rewards. Other general developments in this sector included a significant rise in the number of managers and, especially, of senior managers. Unkind souls might describe this as over-manning and I will be 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 whilst their taxes rose to fund the deficits of the nationalised industries.
We have already noted that these industries were managed by the same people who had managed them before nationalisation and these same people 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 that 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 No 10 Downing Street of Mrs Thatcher in 1979. The Grocer’s daughter had observed what was going on in the Nationalised Utilities sector and she had not liked what she had seen. Accordingly she launched among other policies a determined assault upon trade union monopoly power coupled with an equally determined plan to return the nationalised utilities 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 (ie the old managers) became enormously rich merely by restyling themselves Chief Executives or whatever and applying the most favourable comparisons available to them from the private sector.
It will rightly 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. Every circus has its clowns and we will look at the Railways later! And things did get better by means of just one highly effective expedient. The biggest 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, in gratitude to themselves, transferred significant amounts of the employment costs thus saved to their own reward packages.
What a thing of beauty, what a joy, if not forever as ordained by Keats, then at least for many years. This is the stuff that we cushy number seekers can only dream of. This happy breed, this band of brothers, managerial mediocrities all, cock things up on an Olympian scale, and then, given intestinal fortitude and anti-union legislation by the Iron Lady, partially correct their own failures by dint of a one-off productivity improvement, and become rich beyond the dreams of avarice.
The first name to hit the headlines as a fat cat in the privatised utilities was Cedric Brown, the then Chairman of British Gas. His name has now faded but he became briefly unpopular in the 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. A string of similar acts of generosity towards themselves hit the headlines and it was at this time that the term fat cat assumed common parlance. Among many examples from my cuttings I select the following as being broadly typical.
- Wynford Evans: – Chairman, South Wales Electricity. A 60% pay rise to £192k in 1992 plus share options worth £350k
- John Baker: – Chief Exec of National Power. In 1992 a salary increase from £135k to £348k plus a performance bonus of £92k plus other taxable benefits plus a FISIL aka Final Salary Index Linked Pension. Nice one John!
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 a Mr 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. Mr Rench offered no solution and his successors have made about as much impression.
In the mid nineties Simon Jenkins and Andrew Neil used their columns in The Times and The Sunday Times respectively to lambast the greed of the bosses of the privatised utilities, and to what effect? Quite simply-none! The excesses (as defined by Neil and Jenkins, not by me) have continued to this day. In vain did Simon Jenkins declare that “it is abundantly clear that the people running what are still regulated utilities have spent the past 5 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 columnists rightly noted that these nouveau riches were conveniently free from tiresome commercial competition and of any effective shareholder control of their activities.
The columnists, commentators and pundits sought in vain for mechanisms to curb these excesses. The solution which always appeared to me to lack bite was that shareholders in these companies should exercise control over boardroom excesses (for that read greedy bastards). Broadsheet editorials talked loftily of the need for shareholders to exercise their responsibilities and combine to mitigate and moderate these excesses. I noted in a previous chapter on business tycoons that I would gladly face an annual meeting composed of 500 sober Jeremy Paxmans and 500 drunken Bernard Mannings all howling for my blood in return for the fat cat rewards typically on offer. For the reward packages granted by this group to themselves you can make that 1000 of each, all drunk. The ordeal would be trivial as compared with the rewards. As we know, most threatened revolts just peter out, maybe a few clearly deranged shareholders are allowed to bellow out abuse, and then, it’s hey ho and off to champagne and oysters.
We suspect that one aspect in particular of the fat feline phenomenon in this sector really upsets 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 King Midas level. 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.
Unlike Simon Jenkins and Andrew Neil, you and I do not bemoan the distribution of riches beyond the dreams of your and my avarice to the executives in this sector. For my part the only marginal resentment I feel is when I see this group described as managers. Whenever I see them so described, I recall the comment of Bernard Manning, when hearing a fellow artist say that 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 Mr Paul Getty, Mr 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. The accountant will be instructed to ensure that he does not lose a nought in his calculations. With this core task accomplished the second task is to readjust the price of the commodity in order to fund the package increases. The numbers boy will be sent away to do the necessary sums. The third task will be to sort out a plan to cajole, persuade, and bamboozle the regulator into nodding through the price increases required. This can be tricky and may require some thought.
The one issue which is never considered because it never arises is whether the customer will pay. He will pay because he has no choice. Governments have thrown dust in the eyes of the voters by seeming to bring in an element of competition. All nonsense of course. Why bother with a regulator if we have competition?
This sector of dreams (for those at the top) continues today to exhibit the same features. As I write the top 6 energy companies are being subjected to angry media scrutiny because of their reluctance to reduce prices following the halving of the global (free market) price of crude oil. The top boys eye each warily in the best cartel tradition before announcing trivial cuts in across their complex price schedules. The top boys have rightly noted that the great British public are a bunch of suckers and what do the sharp boys never but never give to suckers. You have got it – an even break. As Jim Royle of Royle family fame might have put it – “competition, my arse!”
Let us now establish the cushy number index of the jobs of the senior executives in the privatised utilities sector. The job demands are negligible. There is a normally a total absence of stress because that is why they entered the sector in the first place. Such stress as does manifest itself from time to time arises when this group get carried away by their own greed to a degree that brings them to the attention of the public. There will be a brief flurry of indignation, new news stories emerge and back they go into affluence and torpor.
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 always hit.
Now for the big one. The reward index. What can we say about the boys who have huge everything, speaking financially of course. Huge salaries, huge pensions, huge share options.
We have arrived. We have identified the perfect cushy number, the cushy number in excelsis. The rest of us can eat our respective envious covetous hearts out.
We should close it off at this point. However we felt that we could not say goodbye to the sector without a tribute to Sir Peter Bonfield from BT. In November, 2001, came news that Sir Peter was to step down as Chief Executive, following a protracted run of bad results. His pay-off for presiding over the decline was estimated at £2.5M when all the various cunningly planned elements were totted up. In The Sunday Telegraph of Nov 4,2001 Mary Fagan reported that “Bonfield was often blind to weakness among senior employees”. Evidently this weakness started with his own superabundant weaknesses. Richard Stott noted in The Sunday Mirror that “BT waved its chief executive goodbye trumpeting abject failure as being well positioned for the future. The truth is the opposite. Staff and Shareholders were stranded up a foul smelling creek while Bonfield paddles off in a golden canoe in the opposite direction”.
We offer a couple of tips at this point. If you fancy your chances:-
- Always but always keep a close eye on what Governments are up to. They almost always get it wrong when they dabble in matters other than the protection of the citizen at home and the defence of the realm abroad. Try to anticipate what they will do and put yourself in a position to benefit from it.
- Then – grease the palm(s) of selected law makers and ensure that you get there first. Whether Governments are moving in or moving out there will be easy money and rich pickings available .
It is appropriate to end this chapter with a brief word about events in Russia following the ousting of Mr Gorbachev by Mr Yeltsin back in 1991. During these years the Russian economy was, and I use the term loosely) privatised to the benefit of Yeltsin and of his paymasters, the oligarchs, and to the corresponding detriment of everyone else in Russia. This was the privatisation to end all privatisations, the largest and most successful mass looting in the long and colourful history of sharp practice.
Prior to privatisation industrial assets such as power stations, mines (coal and metals), energy supplies and so on were wholly owned by the state, that is, in theory if not in practice, to the Russian people . Almost as quickly as it takes to write these words, these latter day sharp practitioners saw their chances and took them .
It could be said that the Thatcher privatisations served as a rehearsal and a model for the much larger scale operation in Russia.
I have quoted enough from what I wrote in 2003 to show that nothing has changed in the past 20 years.
Let me now bring my Cushy Number story up to date.
As I write this blog (August Bank Holiday 2022) there is a lively ongoing public debate about what should be done to improve the performance of the privatised utilities. Gosh – even some Tories are starting to question the appalling performance of the sector.
“From water shortages to soaring energy bills and chaos at airports, greedy bosses have betrayed Thatcher’s privatisation dream”
Alex Brummer, Daily Mail August 9
Greedy Bosses: What greedy bosses?
Let us take a look at who gets what at the top in the water sector.
- Severn Trent Water – CEO – Liv Garfield, Pay – £3.9M
- United Utilities – CEO -Steve Mogford, Pay – £3.178M
- Pennon South West Water – CEO – Susan Davy, Pay – £1.6M
- Northern Ireland Water – CEO – Sarah Venning, Pay – a measly £210,000- oh dear – oh dear
Holdenforth simply notes that that of a lot of very hard work has gone into the challenge of ensuring that those at the top are paid fortunes and the energy that has gone into establishing this agreeable outcome leaves no time to spare for trivial activities such as ensuring that the organisations they lead arrange a reliable supply of clean water to what are laughably termed customers and – just a thought – to ensuring that reliable facilities are installed to eliminate the possibility of the discharge of untreated sewage into rivers and the sea.
A quick look at what has been going on in the privatised rail sector.
An abysmal performance by senior managers too busy lining their pockets to concern themselves with trivia like ensuring that points and signals work properly and that enough staff are employed to drive the trains listed in the timetables.
The would-be travelling public should not be surprised at the militancy being shown by the rail unions given the unseemly combination of ineptitude and greed displayed by senior managers in the sector.
If the organisation is corrupt at the top we, the long suffering UK public ought not be surprised if the workforce decides to follow the example of those at the top.
And so it has come to pass.
Holdenforth outlines a plan to improve the situation.
1. Renationalise the privatised utilities.
2. Build in safeguards to ensure that those running the new organisations focus on meeting the requirements of the wider pubic
These safeguards to include:
- No bonus payments to be made to senior managers
- Effective managers are allowed to keep their jobs
- Ineffective managers – the prompt issue of a P45 – why not appoint Alan Sugar as P45 Czar – a task he would relish.
- This approach to be adopted throughout the organisation
On a personal note, I have some experience in this area because at one time I worked in an organisation which pioneered the concept of emaciated management – and this was several years before the allegedly innovative approach of lean management became fashionable.
3. Poor productivity is said to be a feature of the privatised utilities.
Holdenforth suggests that this feature has arisen because senior managers were simply sleeping on the job.
4. As a sop to Tories sulking about this drift towards socialism – a progressive government should swiftly privatise the BBC .
As I write there is only a week or so to go before Liz Truss is announced as our new prime minister. We mentioned in our previous blog that her in tray will be over flowing.
Very few of the problems bawling for her attention are more serious and more urgent that those outlined in this blog.
I commend our analysis and our suggested solutions to her.
Holden Forth 