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The Privatisation of Public Wealth

Updated: Nov 23, 2022

Mary Jane Amato reports on the history and intricacies of privatisation in the UK and what the benefits and disadvantages are for consumers and the public sector.


As the Ofgem case hits hard on the domestic economy of consumers, talks around privatisation and the pros and cons have resurfaced, inviting us to reflect upon what selling off public sectors to private companies means. 


An explanation of Ofgem

Ofgem is the Office of Gas and Electricity Markets. It is an independent body that regulates the electricity and natural gas markets in Great Britain. Since June 2021, an alarmingly high number of energy suppliers have completely gone bust due to the increase in wholesale gas prices and the government’s price cap, preventing them from increasing costs for consumers. As a consequence, the public will now be burdened with a 2.7 billionpayment to cover these failing suppliers.

The latest report from the National Audit Office, NAO, found that Ofgem took a hazardous approach when it licenced and monitored energy suppliers in an attempt to lure new companies into the market. This has meant an incredibly loose investigation of the companies’ financial circumstances at the time of acquisition. The result has been that by 2021, many of these suppliers could not face the surge in wholesale prices of gas, with 28 of them already collapsing in 2019.

Allowing publicly owned sectors to be privatised or outsourced, and enter the market on a profiteering basis, has been a common practice in the UK, not only in the energy sector but in various others, since the 80s.



Privatisation in the UK and Its Impact on the Economy 


Privatisation is the practice of selling state-owned assets to the private sector. The privatisation process in the UK began after the Thatcher government of 1979 worried that trade unions and public ownership were impeding productivity and profitability. Prior to this, the “Winter of Discontent” during Callaghan’s government was a moment of social unrest and economic unsettlement when strikes against unfair wages occurred due to the 5% cap on wage increase implemented by the Labour Party to combat inflation. The uprisings, together with other collateral causes, led to a motion of non-confidence against Callaghan in 1979, which opened the door to the election of Margaret Thatcher.


Although the plan was initially to shift from public to private ownership and management only the nationalised aerospace and shipbuilding industry, several other businesses were privatised in the years from 1979 to 1983, such as Amersham and half of Cable and Wireless.


The initiative accelerated after the Tories were re-elected in 1983, and other state-owned companies were privatised, including essential utilities like British Telecom (1984) and British Aerospace (1986), as well as other companies in 1987 like Rolls-Royce and British Airways. The objectives of this operation were to make the privatised businesses more profitable, increase labour productivity and effective industry regulation and boost societal ownership of shares.


By the time Margaret Thatcher’s’ mandate ended in 1990, more than 40 UK state-owned enterprises had been privatised. The share of employment accounted for by nationalised sectors declined then from 9% to under 2%. 


Privatisation Acquisitions in the UK from the 1980s to Today


In the UK, privatisation peaked in the early 1990s. Many known public giants have since been turned into privates. Others have undergone public-private partnerships in the form of outsourcing, like in the case of the NHS, which has not been sold off but had some of its bodies contract private companies to deliver specific health services, often to help meet high demand. Let’s look at some cases of Privatisation in three main sectors in the UK: Water, Mail and Telecom. 



The Privatisation of Water in the UK


At the beginning of the 19th century, privates owned and operated water. Later on, since it was deemed a public health necessity, it started being provided by the government, without metering and with bills being estimated on property value. With the 1989 Water Act, water and wastewater in England and Wales were privatised entirely on the back of a proposal of the conservative government. Together with the 10 privatised regional water authorities, three controlling bodies were created as well: The Drinking Water Inspectorate for potable water, The National Rovers Authority (now Environment Agency and Natural Resources Wales) and the Ofwat, which deals with setting the price regime. 

Privatisation invested around £160 billion in improvements to drinking water as well as sewerage functioning and beaches and riverside maintenance. According to those who support and applaud the process of privatisation, it was thanks to it that in the UK, there is now a high quality of water as well as social and environmental progress connected to the correct upkeep of the water supply. Average bills are roughly the same now as 20 years ago,  at £1 per day after accounting for inflation and, according to Ofwat, they are about £120 less than they would have been in the absence of privatisation and strict independent oversight. 


The Privatisation of British Telecom in the UK


By far, the most crucial privatisation in the UK regards British Telecom. In this instance, ministers were especially eager to examine strategies for liberalising the market and fostering competition in the industry. The British Telecommunications Act of 1981 made it possible to free BT from the Post Office's direction. The Act's primary goal was to privatise British Telecom, but it also attempted to provide provisions for the efficient management of the telecommunications sector. As a result, the monopoly that had existed since the industry was nationalised in 1912 was broken. 


The government formally announced plans to sell up to 51% of BT shares to private investors on July 19, 1982. The Government sold its remaining stake in further share sales in 1991 and 1993. The unions were worried that privatisation would result in job losses. According to the British Telecom unions, up to 4,500 of their members' employment was in jeopardy.


The Privatisation of Royal Mail 


The 2015 privatisation of Royal Mail was possibly among the greatest ones in the UK, together with the Railway and water. Since the government first revealed its aim to privatise in 2010, opposition from unions and consumer advocacy groups increased, including the Communication Workers Union's threat of a strike. A nearly 500-year period of governmental control ended with the privatisation of the Royal Mail. 


"It is clear that the Government met its objectives in terms of delivering a privatised Royal Mail. However, it is not clear whether value for money was achieved; it appears that the taxpayer has missed out on significant value” (Business, Innovation, and Skills Committee, UK Parliament).


The Threat of Passport Office Privatisation  


Former Prime Minister Boris Johnson has recently threatened to privatise the Passport Office on the basis of a massive backlog on renovations and allocation. Since 5 million people put off renewing their passports during the COVID-19 pandemic, there was an unprecedented spike in demand after the restrictions were lifted. UK citizens are required to have at least three months of validity on their passports under post-Brexit EU travel regulations, which might add additional stress to the system. According to the PCS union, the backlog of applications is caused by staff shortages, poor management, and problems with private contractors. 


Yet, even though this move might make the service faster and more efficient, what would it actually mean for consumers? The truth is that a brand-new passport is not inexpensive. For an adult over 16 years old, a regular 35-page passport already costs £85.00 in person or £75.50 online, and a 50-page frequent traveller passport costs £95 in person or £85.50 online. Prices will very likely go up if private companies are given control over the passport with only their shareholders being responsible for holding them accountable.


The Pros and Cons of Privatisation

There have been arguments that have supported privatisation since the beginning of time, as well as views that have been clearly against it. Generally speaking, the main reason to justify the process of privatisation is that it increases efficiency, incentivising profit-driven businesses to reduce expenses and increase productivity. On the other hand, government-run businesses typically do not receive profit sharing. A private company more likely to reduce expenses and be effective because it is motivated by making a profit.


Historically though, there have been many disadvantages as well that have come from privatisation. One prominent trend that seems to occur is that government funding of public services is usually reduced often to the detriment of the functionality of the service, and then the assets and services are passed onto private companies thereafter. For certain assets, there is a competitive model that comes into play which means that privatising such an industry would only create a private monopoly with higher prices for consumers rather than the need of nominalisation.


Furthermore, privatisation often benefits at most, the individuals at the top of the hierarchy and as such, much of the money hoarded at the top rarely returns to the public purse.


In Conclusion


It is undeniable that in the UK, historically speaking, there have been countless benefits stemming from the privatisation of certain public sectors. However, after many years of mismanagement and misplaced values the practice has generated problems that deeply affect the public wealth and the wellbeing of the state.


The Ofgem case and the consistent surges in prices of privatised services go to show that these companies have not been regulated appropriately by the designated bodies.

As such, a fair and effective regulatory system is one way we can develop a framework that promotes a more balanced approach, with priority’s moving away from profit first and more towards the public and planets interests.


Furthermore, It could be said that it would be more in the interest of the public if certain sectors are in some capacity reserved for the enrichment of the collective such as basic housing, natural resources, healthcare and even education.


 

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