What should be public and what should be private?

Robert Henderson

Since 1979 every British government has perpetually tinkered with the balance  between private or state provision. Despite the Thatcherite cry for small government the state has has spent  a very large slice of GDP t throughout that time, In 1979 the percentage was 42.75% and in 2010 45.45% The lowest in the period was 34.25%  in 1989 (http://www.ukpublicspending.co.uk/uk_20th_century_chart.html).  However, there have been considerable changes in how the money has been spent.  All the major  nationalised industries have been placed in private hands, Britain’s defence capability has been reduced dramatically;  great swathes of public provision has been either put out to private contract entirely or restructured through mixed public/private enterprises such as the Private Finance Initiative (PFI) and council houses have been  sold off without any attempt to replace them ensure an adequate supply of affordable housing for the future.

Recent governments of any political colour have shown themselves to be firmly in the globalist camp and have allowed more or less unrestricted immigration which has both restricted employment opportunities for native Britons and reduced  wages.  This has added to the massive  unemployment, admitted and disguised, which was created by the structural unemployment resulting from the destruction of Britain’s heavy manufacturing and extractive industries in the 1980s. The immigrants have  also competed for houses and public services  such as education and healthcare.  All of these things mean that much more of public spending goes on the Welfare State and allied services than it did in 1980.

The globalist mania is still upon us with the belief in all major parties that the market is the panacea. This leads the present government to  continue with the idea that anything done by private enterprise is by definition superior to that which is provided by the state, the two great privatising pushes being to privatise the NHS by stealth and the Royal Mail by any means possible, with the first  tentative steps to sell off the country’s roads being taken in their wake. There is next to no serious discussion about what should be privately  and what should be publicly provided. This essay is an attempt to fill that gap by asking the question what should be provided by the state and what should be left to private business and not-for-profit organisations such as charities.

It is easy in principle to decide whether something should be left to private or public enterprise. Simply ask five questions:

(1) Is the service or product generally considered to be a necessity?

(2) Will profit compromise safety?

(3) Is the service obviously inappropriate to be left in private

hands, for example policing or defence?

(4) Can the service be provided by private enterprise without subsidy?

(5) Can free enterprise be reasonably expected to deliver the necessity universally?

If the answer to any of (1)(2)(3) is YES or the answer to either (4) or (5) NO, then it should in principle be provided either directly or indirectly by the state.

What should be provided directly by the state?

Certain things should be reserved to the state as a matter of absolute principle. They are defence, foreign policy, policing, justice, the implementation of judicial sentences and decisions and the administration of welfare. They should be reserved absolutely because either they involve the use of force or the threat of force, punishment or the distribution of taxpayers’ money in areas such as unemployment benefit.

For reasons which I shall shortly examine, the state should also directly control any essential service which is a natural monopoly. What counts as a natural monopoly? Railways and utilities such as water and energy are examples They are natural monopolies because it is simply not practical to have competing lines running to the same destinations or competing utility pipes and cables supplying the same area.

It is possible, as has happened in some of the British privatisations, to allow different companies to compete to supply services such as trains, energy and water, but that is at best an insufficient or incomplete competition and at worst a wholly bogus one because the actual lines of supply – the railway track and the pipes or cables – still have to be maintained and owned by some organisation, private or public. That means the infrastructure has to be either owned publicly or, if owned by a private company, the company must be rigorously controlled by the state, as is the case with the British telephone landline infrastructure which is owned by the privatised British Telecom.

British government interference with natural monopolies since privatisation has gone far beyond controlling the infrastructure. In the case of the railways, a considerable public subsidy has been paid and continues to be paid to the private operators. In every monopoly industry a regulator has been appointed to control both prices and, in theory at least, to force companies to do things such as provide a certain level of investment in new equipment and to be conscientious when it comes to maintenance and operation of the infrastructure. To pretend that these monopoly industries are private companies working in a free market is patently absurd. They are effectively public services contracted out to private contractors.

A few services only work as monopolies, the classic example being the universal letter post, that is, letters delivered to any part of a territory for the same price. This only works if it is a monopoly because if there is competition from private companies or municipal postal services they will take sufficient of the profitable trade in the towns and cities to make it impossible for the universal supplier, in this country the Royal Mail, to subsidise the loss making deliveries to parts of the country outside the main urban centres. No private company would ever provide universal coverage unless they had a monopoly.

Why should the state directly control essential monopolies? Firstly, because there is no opportunity for meaningful competition and consequently the state must step in to prevent abuse of the monopoly position. To do that, as we have seen, it has to interfere very strongly with the running of the monopolies. In practice, it can only efficiently do this if it directly controls the monopoly.

If the state subcontracts an essential monopoly to private business or allows private business to buy a monopoly two general problems arise. The first difficulty is that a private business may at any point fail as a business or simply refuse to continue with a contract if it is not making money for the business. If that happens the state is over a barrel because it does not have the resources to immediately take over the enterprise, nor is it probable that another private company would be able or willing to step in at a moment’s notice – the worst outcome would be the cessation of a vital industry. Nor, if a company failed, is it obvious how a Government would prevent its assets being sold by a liquidator. In principle when Railtrack failed – the company which after privatisation had the responsibility for maintaining the infrastructure of the British rail network – the shareholders owned the assets (the railway infrastructure including much highly profitable land) and the creditors had a legitimate charge on them.

Clearly no government could allow the railway or vital industries such as water, gas and electricity simply to go under, either at the national or regional level. Hence, any government will, when shove comes to push, have to pay through the nose (your taxpaying nose in fact) to maintain the threatened industry, whether that be through enhancing a contract to make it more profitable, granting more profitable contracts to a new private contractor or through the payment of outright subsidies. A government is in a similar bind if a company is doing a bad job: they cannot simply sack them because who is to take their place?

Natural monopolies also raise other problems if they are in private hands. There is insufficient public control over areas such as maintenance and strategic planning. Good British examples can be found in the privatised water and energy industries. In the case of water the privatised companies have failed to invest adequately to stop the considerable loss of water from cracked pipes. Nor has a single major reservoir been built in England since privatisation. These investment failures have occurred despite the water companies consistently making healthy profits. The Water Regulator huffs and puffs but achieves little because the water companies know he can do little. Indeed, he has to date not even fully used the powers he has despite issuing many warnings to the water companies. And the Government? Well, they could pass a new law giving them direct powers over the water industry but what then? If a water company simply refuses to do what is needed where does the Government go? Nowhere fast is the answer.

With energy it is the strategic planning which is emasculated. Successive British governments have allowed Britain to sleepwalk into a position where the country went rapidly from being self-sufficient in energy to becoming a net importer. This was entirely predictable as it was known long before it happened that North Sea oil and gas was going to decline substantially from the beginning of the century. Despite this no meaningful strategic planning has taken place since privatisation with governments until very recently childishly claiming that it was not for them to interfere in the actual provision of energy now the industry is privately owned (the Blair Government has just woken up to the strategic danger of being dependent on foreign supplies but even now -2006 – no definite decision has been made on future British energy policy). The upshot of this lack of planning has been rapidly rising energy prices since 2005.

If water and the energy utilities had remained in public ownership, the fact that politicians had ultimate responsibility for them would have ensured that maintenance and strategic planning was not neglected because no politician or government could afford to be blamed for a water crisis or soaring power prices. Government could also subsidise  prices, something it cannot do now even if it chose to because of EU  competition rules. . The same principle applies to most of the privatised industries – take away the political responsibility and the profit motive rules.

Certain things are simply too important to be left to private efforts. Natural monopolies such as the railways, water and gas are literally essential to the survival of an advanced state such as Britain. Because of that stark fact alone they need to be treated as something much more than a commodity which can be simply left to the market. They should to be seen for what they are, strategic assets, and placed firmly under national control.

There is a further general reason why essential monopolies should be in public hands – the need for general provision. Left to private enterprise, even with an unfettered monopoly only the profitable parts of an industry would be supplied. Roads and railways would only be maintained if the traffic warranted it. Gas, electricity, water and telecommunications would only be supplied where sufficient profit could be made. The problem is we do not want roads and railways only over profitable routes, or the utilities such as gas and water supplied only to urban areas. We want them over the entire country. Only public provision can truly satisfy that need. Of course, private companies can have a duty to provide a general provision placed on the them but what if none is willing to take it or they take on the responsibility but then fail to meet it? The government then has to decide to either subsidise the company directly or to loosen the contract conditions to which the company has agreed.

The final type of enterprise which the state should always take in hand are those which experience tells us are beyond the resources of private business. Private enterprise can never be trusted to handle Tunnel. Margaret Thatcher insisted that no British public money would be involved and that private enterprise would bear the entire cost. It soon became clear that this was a nonsense. The Tunnel itself was completed but the companies which built it were not so much bankrupt as on another planet called Debt. And this was despite the very serious amounts of money pumped into the enterprise by the French Government,  both directly and indirectly. The situation was rescued, if one can dignify what happened with the word, by the banks and other  creditors rescheduling debts so far into the future that they all but vanished and the French Government surreptitiously pushing in more money via the French banks. To this day, the Channel Tunnel is the whitest of white private enterprise elephants, with the latest ” debt restructuring” always just around the corner.

Direct provision also has a further benefit. While assets are publicly owned and employees directly paid by the state, it is politically much more difficult to reduce or abolish that part of public provision. If the provision is supplied by a private company their contract can simply not be renewed or cancelled. If the provision is directly supplied, the government has the ticklish problem of having to take responsibility for the redundancies, something which greatly raises the profile of the removal of the provision.

The best example of the dangers of losing direct provision is the gradual privatisation by stealth of the NHS. To suddenly privatise the entire NHS would be impossible, but salami slice it over ten or fifteen years by continually increasing the private sector involvement and the position is completely different. Then the politician can use excuses such as “So much of it is in private hands now that the rest might as well be,” “We can’t have such a comprehensive service because private companies can’t provide it” and “Costs have risen so much that we have to cut this or that”. The whole system will be such a confused mess of public and private that the public will not know what to think. Also, the privatisation by stealth may have surreptitiously changed the way the public view the NHS so they see it no longer as a national institution but merely as a provider of medical care through disparate means. That in itself would reduce the moral outrage needed for any successful public protest.

The railways – a classic public service

The railways in Britain are not simply a private enterprise. They are a necessity to maintain general economic activity. Take away the railways and a substantial part of those employed in London could not continue to work there because the roads will not take the extra traffic. The same applies, to a lesser degree, to other large cities and towns.

The railways also fulfill an important social functions in providing transport to those without cars, by reducing car use generally and moving much heavy goods traffic from the roads. Finally, railways have a strategic value in times of war or blockade.

Without massive public subsidy the railways could not be maintained. No national railway system in the First World operates without taxpayers’ subsidy. Parts of systems may be profitable but not the entire system. It is not that our railways would simply shrink if left entirely to private enterprise, most of the system would not run at all. Commuter traffic is running at near capacity in the South East of England and fares are already so high generally that the massive price hike needed to meet the full cost of rail travel would result in a vicious circle of decreased traffic and decreased revenue.

The cost of maintaining Britain’s railways is simply beyond the private sector. Profit can be made on some intercity routes but that is about it. Even with the massive subsidies given to private companies since privatisation – ironically substantially larger than the pre-privatisation subsidies in real terms – private companies have signally failed to invest adequately. Indeed, the companies have radically reduced staffing levels – which may well have contributed to some crashes – and have constantly failed to meet their timetables.

The farce of the company with responsibility for railway maintenance immediately after privatisation in Britain, Railtrack, is a cautionary tale in itself. It created a completely different culture from that under the nationalised railways. Instead of employing most of the labour directly, they engaged subcontractors to do most of the work. The army of skilled workers built up by the original private companies and inherited by the nationalised ritish Rail was dispersed in reckless fashion and, inevitably, control over standards of maintenance became much diluted as it always does with subcontracting.

To put the cherry on the Railtrack story, the financial resources of the company, even with public subsidies, proved hopelessly inadequate. In 2002 the plug was pulled and it went into administration to eventually re-emerge restructured as a not-for-profit company  Network Rail. But before the administration was done and dusted, the axpayer had to cough up a great deal of money to compensate  shareholders because the government was faced with legal  action by the shareholders alleging maladministration, an  action which looked as though it might not only succeed but in the  process wash some very dirty government linen in public over exactly why and how Railtrack went into administration.

Safety

There is a further consideration with public services – safety. It may be that the public will have greater confidence in, for example, a state run railway simply because it is state run. The public’s confidence might be completely unfounded but that would not matter: theconfidence itself is a valuable thing.

The experience of all privatisation has been to make money by enforcing massive job cuts. Of course there was overmanning during the nationalised industry days. The trouble is that the cuts made since privatisation have often gone beyond improving efficiency. They went to the limits of safety, and probably past it, in pursuit of profit. Maintenance staff were reduced and consequently maintenance was reduced. The facts which have emerged since the Watford train crash in 2000 shows beyond doubt that many of the people involved in rail track maintenance are inexperienced at best and completely raw at worst.

When the state does not take direct responsibility for a service which has inherent safety consideration, the danger is that governments will respond to any safety fears by imposing ever more onerous obligations on the private suppliers of the service. The private companies are also susceptible to being overly cautious after an accident has happened or a possible danger becomes the subject of public comment.

Train crashes in Britain have been thankfully rare under both nationalised and privatised regimes, but when they happened under the nationalised industry the government was able to keep the show on the road because the public had confidence that safety was not being compromised simply to save money. Since privatisation crashes

have been met with absurd caution by both the bodies responsible for the infrastructure and the Government, with the national rail network being reduced to a farce after cracks in some rails were found after the Watford crash mentioned above. For the better part of a year, rail travel became a misery as hundreds of emergency speed restrictions were introduced and rails were tested for cracks and a massive programme of ail replacement was begun. The consequence  was horrendous delays and vast numbers of cancelled trains. The effects are arguably still being felt in 2006.

Perhaps the classic industry to which the safety consideration applies is the production of nuclear energy. Despite this this Government is saying that if a new generation of nuclear power stations is built it must be with private money and run by private companies. A clear case of  ideology – private is best – driving common sense out of the window. (It should be added that Labour said the same when in office.)

Foreign ownership further complicates matters. When a massive explosion devastated a fuel storage and refinery complex in Hemel Hempstead in 2006 and further parts of the complex were thought to be in danger of exploding, it was impossible to get the necessary information quickly because the company which owned the complex was French and no one with  sufficient authority could be immediately contacted.

What should be provided indirectly by the state?

Just because something is a necessity does not mean that the state must or should provide it directly. In fact, the less direct provision the better, because in a free society government should only touch that which it needs to touch. For example, whereas there are not many possible suppliers of air traffic control systems or railways, there

are many possible suppliers of food. Government may safely leave food distribution to the private supplier and provide assistance where it is needed through payments to those in need. It should be noted that it is not the market or private enterprise which provides the general provision in cases such as food but the giving of taxpayers’ money to those who need it which provides the general provision.

Service is really the crucial criterion. Governments should become directly involved in industrial work very rarely – the exceptions are defence suppliers, utilities such as water, gas and electricity because of their status as natural monopolies and their immense importance. No nationalised industry making or extracting anything has ever been an economic success. Governments running manufacturers, farming or the extractive industries such as coal mining are neither necessary nor desirable, because private enterprise will always do the job adequately and more efficiently provided the economic circumstances are right,that is, vital industries are protected through tariffs, quotas or subsidies to the extent necessary to make them profitable.

But such vital industries are the Government’s business because they have both a strategic and a social and economic value. Consequently, governments do have is a responsibility to ensure that they are maintained.

Any country which cannot feed itself, produce all essential manufactured products and services, is not self-sufficient in energy and does not have substantial reserves of essential raw products such as iron ore, is constrained in what it may do both nationally and internationally and the greater the reliance of imports, the greater the constraint. Of course any advanced industrial state will not be completely self-sufficient, but it is possible for a country to have a large degree of self-sufficiency in the essentials especially food. With modern crop yields and modern animal husbandry, Britain could feed itself at a pinch if her market for food was protected to allow reasonable profits to be made by farmers using not merely the best or most convenient land, but the more marginal land as well.

Where a country is severely dependent on imports, as is the case with Britain, they are utterly at the mercy of international blackmail and events. Even the most powerful state in the world, the USA, is much restricted because of its reliance on imported oil. Such constraints have the most serious of consequences. Would George Bush  have invaded Iraq if the USA was not reliant on Middle East oil? I doubt it.

The free trade dream of buying where a product can be produced cheapest is based on the absurd premise that never again will international circumstances arise which will place any country at risk of war or blockade. There is also the question of what happens when raw materials run short and the scarce materials either remain in the countries of origin or go to the richest and most powerful countries with the rest left to go hang. Free trade is not merely a fantasy but a dangerous one in the long term.

There is also the economic and social case for protection. Cheap imports from countries which have labour costs many times below those of the mature industrial states, goods made cheap by state subsidies and plain old-fashioned “dumping” means that no company in the West is able to compete with the imports. The effect of allowing such imports is twofold: either the workers in the importing countries must take lower wages or, more probably, watch the obliteration of the domestic industry.

The same thing happens where mass immigration is permitted. If the immigration did not occur the wages for the type of jobs which immigrants take would be higher. That in turn would lessen or end the shortages of native workers willing to do them. For most jobs all that is needed to solve a shortage of labour is a wage sufficiently competitive with other employments to attract enough applicants. A good example in Britain are nurses: a shortage of native applicants a few years ago has been turned into a surplus now by a substantially increase in their pay.

The loss of jobs and suppression of wages through cheap imports, outsourcing, or large scale immigration has considerable social and economic effects. Those who lose their jobs either remain unemployed or take jobs which pay much less, are less secure and have lesser benefits. Those who remain in their jobs but whose pay is suppressed suffer similar difficulties. Both groups find their spending power is reduced. They pay less tax. If they are unemployed the Treasury is a net loser. New immigrants compete for scarce public goods such as free healthcare, education and social housing. Most particularly they compete most directly with the poorer native members of society who have most need of such social supports.

Poor pay, insecurity, unemployment and competition from mass immigration all place a severe strain on the social cohesion of a country.

Neither the Left or Right need recoil in horror at the idea of a judicious protectionism,a strong immigration policy and a commitment to public provision for those things which cannot be provided by private enterprise either efficiently or at all.  The Labour Party has been strongly protectionist throughout most of its history. The Tory Party was protectionist before the repeal of the Corn Laws in 1846 and protectionist again between 1931 and the advent of Margaret Thatcher. For most of their history both parties have been in practice opposed to mass immigration. Both Labour and Tories have been comfortable with state provision in the past.  There is nothing but their ideological obsession with laissez faire economics and globalism to stand in the way of returning to a more balanced view of how the state should intervene.