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Why Labour’s plans to renationalise certain public services make economic sense

The UK Labour Party says it intends to nationalise a number of key public services. The full plans are not yet released but there has been talk of taking BT’s Openreach broadband network, the railways, the Royal Mail and water and energy companies back into public ownership – all of which were sold or contracted off by previous governments.

Politically, this nationalisation strategy is in line with public opinion. Polls suggest 65%, 60%, 59% and 53% support public ownership of Royal Mail, railways, water and energy companies respectively. The CBI business lobby has criticised these plans on financial grounds, estimating the cost of such a buy-back to be £182bn. But the exact figures are hard to calculate and, depending how these services are run, they could end up benefiting the public overall.

Economists have long debated the merits of nationalisation. To understand the UK’s current debate, it’s important to know the theory behind nationalisation and privatisation as well as what has happened in practice.

In theory …

Free-market economist Milton Friedman argued that private business ought to operate solely to increase returns to shareholders. It is government, not business, Friedman argued, to which the public ought to look if the market does not deliver adequate social goods. This implied a case for public ownership of certain industries.

Other liberal or neoliberal economists – though not all, of course – have similarly argued that market forces will be insufficient to deliver socially efficient results in the case of utilities and infrastructure monopolies. It follows that there is no consistent theoretical case these industries should be privately run.

This does not mean, of course, every industry should be nationalised – nor does Labour argue they ought to be. There is no intention to nationalise formerly state-owned companies operating in markets where there is adequate competition, such as British Airways, Rolls-Royce or BP.

British Airways was privatised in the 1980s. Andy Kennaugh via Wikimedia

In short, there may be an economic case for democratic governments to organise and run utilities and public infrastructure for the benefit of citizens, as Labour suggests.

By the 1970s, many of the UK’s productive assets, including transport infrastructure and utilities were in public hands. However, although the 1979 Conservative party manifesto barely mentioned privatising these assets, their sale was a policy that defined the Thatcher era.

There were three basic motivations given for privatisation: to raise funds to boost the economy in a time of recession; to promote more efficient UK business; and ultimately to help create a capital-owning democracy, effectively making citizens both stakeholders and shareholders in the UK.

Privatisation was also, of course, pursued for ideological reasons. Some politicians and business leaders are of the opinion the public sector should not own or operate productive assets.

In practice …

In terms of raising funds, privatisation was a limited success. The government of the day managed to raise more than US$80 billion through the sale of public assets. But these were often offered at a discount and so more money could have been made.

Privatisation generally failed to meet its other objectives. There is scant evidence of benefit to the customer (UK citizens) from privatisation. And the policy was a clear failure in facilitating a capital owning democracy – the ownership of privatised industries largely passed into foreign hands. In fact, privatisation led to the UK becoming an increasingly foreign-owned democracy, rather than a capital-owning one.

Back to the future

In some cases, what we call “privatisation” is public contracting. For example the UK’s railway network is owned by the UK government but franchised to private train operating companies. In these cases, ownership will pass back to the public by default when contracts expire.

In others, the cost of renationalisation is relatively small. It has been estimated that nationalising Royal Mail would cost £2.6 billion. As the government raised £3.3 billion from its sale, a £700 million profit would be made on renationalising it.

But there seems no strong case for renationalising industries where the problem of excessive market power can be addressed through market forces. If central or local government were to provide one or more publicly-run utilities companies – offering fair and transparent tariffs – citizens could transfer their custom if they felt private operators were not offering a good deal.

New Zealand, for example, has adopted this approach and operates publicly-owned utilities companies – and even a bank. This is to ensure private operators do not accrue too much (potentially socially damaging) market power, and also to prevent the economic exclusion of smaller communities. There is no reason why such an approach might not also extend to the provision of high-speed broadband, given that access to this service is increasingly necessary.

There is evidence that privatisation of public infrastructure and utilities was a failed and unpopular policy – but it may be too costly to undo all the consequences. While there is a strong case for public ownership to prevent the private accumulation of market power, or where the market will neglect particular communities as “unprofitable”, establishing new public industries may be a more effective way to achieve this than renationalisation.

Notwithstanding, the success of nationalisation depends on whether or not it is possible to develop a means by which UK citizens can ensure they retain ownership of valuable public assets. There is no point in spending taxpayer money on nationalisation if the resulting enterprise can simply be re-sold in future – whether to access short-term funding or for ideological reasons. Selling assets cheaply and buying them back dearly is no way to run either a business or a nation.

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